UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended June 30, 2012
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 1-12607
SunLink Health Systems, Inc.
(Exact name of registrant as specified in its charter)
Ohio | 31-0621189 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339
(Address of principal executive offices)
Registrants telephone number, including area code: (770) 933-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each Class |
Name of each Exchange on which registered |
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Common Shares without par value | NYSE Amex Equities |
Indicate by check mark whether if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
¨ (Do not check if a smaller reporting company) |
Smaller reporting company |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
At the close of business on September 20, 2012, there were 9,447,949 shares of the registrants common shares without par value outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price on December 31, 2011 of the registrants common shares as reported by NYSE Amex Equities stock exchange amounted to $6,006,351.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc., scheduled to be held on November 5, 2012, have been incorporated by reference into Part III of this Report. The Proxy Statement or an amendment to this Annual Report will be filed with the Securities and Exchange Commission within 120 days after June 30, 2012.
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Certain Cautionary Statements
FORWARD-LOOKING STATEMENTS
This Annual Report and the documents that are incorporated by reference in this Annual Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as may, believe, will, expect, project, estimate, anticipate, plan or continue. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to:
General Business Conditions
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general economic and business conditions in the U.S., both nationwide and in the states in which we operate; |
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the competitive nature of the U.S. community hospital, homecare, and specialty pharmacy businesses; |
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demographic changes in areas where we operate; |
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the availability of new long-term financing to replace our current credit agreement lender; |
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the availability of cash or borrowings to fund working capital, renovations, replacement, expansion and capital improvements at existing healthcare and specialty pharmacy facilities and for acquisitions and replacement of such facilities; |
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changes in accounting principles generally accepted in the U.S.; and, |
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fluctuations in the market value of equity securities including SunLink common shares; |
Operational Factors
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inability to operate profitably in one or more segments of the healthcare business; |
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the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists and staff personnel for our operations; |
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timeliness and amount of reimbursement payments received under government programs; |
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changes in interest rates under debt agreements; |
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the ability or inability to refinance existing indebtedness and potential defaults under existing indebtedness; |
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restrictions imposed by debt agreements; |
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the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance; |
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the efforts of insurers, healthcare providers, and others to contain healthcare costs; |
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the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or via alternative healthcare services, such as surgery centers or urgent care centers; |
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changes in medical and other technology; |
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risks of changes in estimates of self insurance claims and reserves; |
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increases in prices of materials and services utilized in our Healthcare Facilities and Specialty Pharmacy Segments; |
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increases in wages as a result of inflation or competition for management, physician, nursing, pharmacy and staff positions; |
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increases in the amount and risk of collectability of accounts receivable, including deductibles and co-pay amounts; and, |
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the functionality of or costs with respect to our management information system for our Healthcare Facilities and Specialty Pharmacy Segments, including both software and hardware; |
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the availability of and competition from alternative drugs or treatments to those provided by our Specialty Pharmacy Segment; |
Liabilities, Claims, Obligations and Other Matters
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claims under leases, guarantees and other obligations relating to discontinued operations, including sold facilities, retained or acquired subsidiaries and former subsidiaries; |
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potential adverse consequences of known and unknown government investigations; |
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claims for product and environmental liabilities from continuing and discontinued operations; |
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professional, general and other claims which may be asserted against us; and |
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natural disasters and weather-related events such as earthquakes, flooding, snow, ice and wind damage and population evacuations affecting areas in which we operate. |
Regulation and Governmental Activity
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existing and proposed governmental budgetary constraints; |
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the regulatory environment for our businesses, including state certificate of need laws and pharmacy licensing laws and regulations, rules and judicial cases relating thereto; |
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anticipated adverse changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLinks healthcare facilities and specialty pharmacy services including the payment arrangements and terms of managed care agreements; |
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changes in or failure to comply with federal, state or local laws and regulations affecting our Healthcare Facilities and Specialty Pharmacy Segments; and, |
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the possible enactment of additional federal healthcare reform laws or reform laws in states where we operate hospital and pharmacy facilities (including Medicaid waivers, competitive bidding and other reforms). |
Acquisition and Merger Related Matters
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the availability and terms of capital to fund acquisitions, improvements, renovations or replacement facilities; and |
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competition in the market for acquisitions of hospitals and healthcare businesses. |
The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner.
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You should read this Annual Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Annual Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report.
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PART I
Item 1. |
Business (all dollar amounts in thousands except share, per share and revenue per equivalent admission amounts) |
Overview
We are SunLink Health Systems, Inc. Unless the context indicates otherwise, all references to SunLink, we, our, ours, us and the Company refer to SunLink Health Systems, Inc. and our consolidated subsidiaries. We are a provider of healthcare services in certain markets in the United States. References to our specific operations refer to operations conducted through our subsidiaries and references to we, our, ours, and us in such context refer to the operations of our subsidiaries. Our business is composed of two business segments, the Healthcare Facilities Segment and the Specialty Pharmacy Segment. Through our subsidiaries, we operate a total of five community hospitals in three states. Four of the community hospitals are owned and one is leased. Our community hospitals are acute care hospitals and have a total of 342 licensed beds. As part of our community hospital operations, we currently also operate (a) two nursing homes in two states, each of which is located adjacent to, or in close proximity with, one of our community hospitals, and (b) one home healthcare agency operated from one of our community hospitals. Our nursing homes have a total of 166 licensed beds. We also own a hospital building with a total of 60 licensed beds that we lease to a third party, which owns the hospital license for the facility, with an option to purchase. Through a subsidiary acquired in April 2008, we also operate a specialty pharmacy business with four service lines. Our healthcare operations are conducted through our direct and indirect subsidiaries, including SunLink Healthcare LLC (SHL), HealthMont LLC (HealthMont) and SunLink ScriptsRx, LLC (ScriptsRx).
Our executive offices are located at 900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339, and our telephone number is (770) 933-7000. Our website address is www.sunlinkhealth.com. Information contained on our website does not constitute part of this report. Any materials we file with the Securities and Exchange Commission (SEC) may be read at the SECs Public Reference Room at 100 F Street, NE, Room 1580 Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Certain materials we file with the SEC may also be read and copied at or through our website or at the Internet website maintained by the SEC at www.sec.gov.
History
We are an Ohio corporation and were incorporated in June 1959. In 2001 we redirected our business strategy toward healthcare services in the United States. On February 1, 2001, we purchased five community hospitals, leasehold rights for a sixth hospital and the related businesses of all six hospitals. We subsequently have acquired two hospitals, sold two hospitals and three home health businesses, and the sold the operations of one hospital to a buyer who leases the hospital from us, and in June 2004, we sold a hospital. In 2008, SunLink ScriptsRx, LLC subsidiary acquired Carmichaels Cashway Pharmacy, Inc. (Carmichael). Carmichael provides services to patients in rural communities in southwest Louisiana and eastern Texas.
Business Strategy: Strategic Alternatives, Operations, Acquisitions and Dispositions
SunLinks business strategy is to focus its efforts on internal operations of its existing healthcare facilities and its pharmacy business, supplemented by growth from potential healthcare acquisitions, including but not limited to hospitals, physician clinics, ambulatory surgery centers, nursing homes and pharmacy businesses. However, as was the case in 2004 with our Mountainside Medical Center hospital, in September 2009 with the sale of three home health agencies, in March 2011 with the sale of our Chilton Medical Center (Chilton) operations and in July 2012 with the sale of Memorial Hospital of Adel and Memorial Convalescent Center (collectively Memorial), we consider dispositions of any of our facilities or operations based on a variety of factors including asset values, return on investments, competition from existing and potential facilities, capital improvement needs, corporate strategy and other corporate objectives.
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On July 2, 2012, the Company and its HealthMont of Georgia, Inc. subsidiary completed the sale of substantially of all the assets of the Companys owned hospital, Memorial to the Hospital Authority of Tift County, Georgia (Tift) for approximately $8,350. Excluded Assets include Accounts Receivable as of April 1, 2012 and all Medicare and Medicaid electronic health records incentive payments (EHR Funds) for meaningful use of electronic health record technology and all receivables, claims and settlements made pursuant to the Indigent Care Trust Fund of the State of Georgia (ICTF) paid with respect to the State of Georgias fiscal year ending June 30, 2012. Retained Liabilities consist of liabilities of Memorial incurred prior to the closing date of the transaction. The net proceeds from the sale of approximately $7,500 were used to repay a portion of the Companys senior debt under the Term Loan under the Companys Credit Facility.
Operations Strategy
Our operational strategy is focused on efforts to improve the operations and profitability of our community hospitals by reducing out-migration of patients, recruiting physicians, expanding services and implementing and maintaining effective cost controls. Our operational strategy for our nursing homes and home health agency is similar to that for our community hospitals and is focused on expanding services and implementing and maintaining effective cost controls. Our operational strategy for our Specialty Pharmacy segment is focused on increasing market share, expanding services, and implementing and maintaining effective cost controls.
Acquisition and Disposition Strategy
Although the Companys situation could change, based on its current financial position as well as uncertainties in the healthcare industry, the Company is not actively seeking acquisitions for its Healthcare Facilities or Specialty Pharmacy Segments. However, during the last fiscal year, we evaluated certain rural and exurban hospitals and healthcare businesses, which were for sale and monitored other selected healthcare acquisition targets which we believed might become available for sale.
When we seek to acquire hospital or pharmacy businesses, our acquisition strategy is to acquire such businesses in rural or exurban markets where the acquisition is complementary to our existing facilities and services and in new markets where the scale of the acquisition is sufficient to provide a foundation to grow in that area.
Although we have no current plans to do so, from time to time we may consider the acquisition of other complementary based healthcare businesses, outside of our existing business segments, which are or may become available for acquisition.
We continue to engage in similar evaluation and monitoring activities with respect to hospitals, nursing homes, home health businesses, pharmacies and other rural or exurban healthcare businesses, which are or may become available for acquisition.
Historically, we targeted the rural or exurban community hospital market because we believed it provided an attractive sector for investment in healthcare facilities. We continue to believe hospitals and other healthcare businesses in our markets generally experience (1) less direct competition although competition has increased in recent years in each market, (2) lower managed care penetration, (3) more manageable inflationary pressure with respect to certain costs, (4) higher staff, employee and community loyalty, and (5), in certain cases, opportunities for future growth. The focus of acquisition activities will depend on our evaluation of relative opportunities for growth and profitability within the business segments and services lines of our existing operations, the capital needs of our existing and potential operations within such existing and potential segments and services lines, current and potential changes in government regulation and reimbursement rules, competition for potential acquisitions and valuations of existing or potential new healthcare related facilities and operations and other factors.
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Extensive competition may exist for healthcare facility acquisitions, primarily from for-profit management companies and not-for-profit entities which may have greater financial and other resources than SunLink. Competition for the acquisition of non-urban acute care hospitals, related services (such as physician clinics and practices), and other healthcare facilities could have an adverse impact on our ability to acquire such healthcare businesses on favorable terms or at all.
We believe there may be opportunities for acquisitions or dispositions of individual hospitals in the future due to, among other things, continued negative trends in certain government reimbursement programs and other factors. We also believe there may be opportunities for the acquisition or disposition of individual or groups of hospitals in the future as other not-for profit and for-profit hospital operators seek to re-align the focus of their portfolios.
Opportunities to acquire not-for-profit hospitals remain uncertain. Even if such opportunities improve, in recent years, the legislatures and attorneys general of several states (including Georgia and other states which we believe might have suitable acquisition targets) have shown a heightened level of interest in reviewing transactions involving the sale of not-for-profit hospitals. The legal authority for such review is generally known as conversion legislation. Although the level of authority for, and interest in, such reviews varies from state to state, the trend is toward increased governmental authority for review and review of such transactions including, in some cases, the imposition of requirements on the seller, the buyer or both as a condition to the approval of a not-for-profit corporation selling a healthcare facility. Accordingly, even if the opportunity or desirability of acquiring not-for-profit hospitals improves, governmental review may make it more difficult or expensive to complete any such acquisitions.
Our acquisition strategy for other healthcare businesses, including nursing homes, physician clinics and practices, and other related businesses is to acquire businesses in areas which are complementary to either our existing hospitals or our pharmacy business or which are located in markets which we perceive as desirable.
As noted above, we sold Memorial in July 2012. From time to time we may consider the additional dispositions of one or more of our healthcare facilities, service lines or business segments, particularly if we determine that the operating results or potential growth of such facility, service line or segment no longer meet our business objectives.
Healthcare Facilities Operations
SunLinks Healthcare Facilities Segment is composed of three operational areas:
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Our five community hospitals; |
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Our two nursing homes, each of which is located adjacent to, or in close proximity with a corresponding SunLink community hospital; and |
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One hospital related home health agency, which operates for a corresponding SunLink community hospital; |
In addition, we own one hospital facility which is leased to a third party, which owns the hospital license for the facility, with an option to purchase.
Through our subsidiaries, we operate a total of five community hospitals in three states. Four of the community hospitals are owned and one is leased. SunLinks community hospitals are acute care hospitals and have a total of 282 licensed beds. We also own one 60-bed hospital building that is leased to a third party with an option to purchase at the end of the lease. In connection with our community hospital operations in certain communities, we also operate (a) two nursing homes located in two states: each of our current nursing homes is located adjacent to our community hospitals, and (b) one home healthcare agency operated from one of our community hospitals. Our nursing homes have a total of 166 licensed beds.
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Owned and Leased Hospitals
All of our hospitals which we operate are owned except Missouri Southern Healthcare, which is a leased hospital. The following sets forth certain information with respect to each of our six community hospitals which we currently own:
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Chestatee Regional Hospital (Chestatee), located in Dahlonega, Lumpkin County, Georgia, is a 49-licensed-bed, acute care hospital accredited by the Joint Commission on Accreditation of Healthcare Organizations ( JCAHO). It includes a 12-bed obstetric department, a four-bed intensive care unit (ICU) a 33-bed medical/surgical/pediatrics unit, and 10-bed geriatric psychiatric unit (GPU). Chestatee is the only hospital in its primary service area of Lumpkin and Dawson Counties. |
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North Georgia Medical Center (North Georgia), located in Ellijay, Gilmer County, Georgia, consists of a JCAHO accredited 50-licensed-bed, acute care hospital and Gilmer Nursing Home, a 100-bed skilled nursing facility. North Georgia is the only hospital in Gilmer County. The Company has a 24-bed Certificate of Need (CON) to replace the existing hospital and to add a 10-bed inpatient geriatric psychiatric program. |
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Trace Regional Hospital (Trace), located in Houston, Chickasaw County, Mississippi, consists of a JCAHO accredited 84-licensed-bed, acute care hospital, Floy Dyer Manor Nursing Home, a 66-bed nursing home, and a 15-bed GPU. Trace is the only hospital in Chickasaw County. |
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Missouri Southern Healthcare (Missouri Southern), located in Dexter, Stoddard County, Missouri, is a 50-licensed-bed, acute care hospital. It includes a four-bed ICU. It is the only hospital in Dexter, Missouri. The lease expires in 2019. It operates a home-health agency. |
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Callaway Community Hospital (Callaway), located in Fulton, Callaway County, Missouri, consists of a 49-licensed-bed, JCAHO accredited, acute care hospital and a 19-bed GPU. Callaway is the only hospital in Callaway County. |
We also own the Chilton Medical Center (Chilton) hospital building located in Clanton, Chilton County, Alabama which we lease to a third party. Chilton is a 60-licensed-bed, JCAHO accredited, acute care hospital. The third party has the option to purchase the facility. Chilton is the only hospital in Chilton County.
Hospital Operations
Utilization of Local Hospital Management Teams
We believe that the long-term potential of our hospitals is dependent on their ability to offer appropriate healthcare services and effectively recruit and retain physicians. Each SunLink hospital has developed and continuously seeks to implement an operating plan designed to improve efficiency and increase revenue including, but not limited to, the expansion of services offered by the hospital and the recruitment of physicians to the community.
Each hospital management team is comprised of a chief executive officer, chief financial officer and chief nursing officer. The quality of the on-site hospital management team is critical to the success of our hospitals. The on-site management team is responsible for implementing the operating plan under the guidance of SunLinks senior management team. Each hospital management team participates in a performance-based compensation program based upon the achievement of operational, clinical and financial goals set forth in the operating plan.
Each hospital management team is responsible for the day-to-day operations of its hospital. Our corporate staff provides support services, assistance, and advice to each hospital in certain areas, including strategic planning, physician recruiting and relationship management, corporate compliance, reimbursement, information systems, human resources, accounting, cash management, capital financing, tax and insurance. Financial controls are maintained through the utilization of standardized policies and procedures and monitoring by corporate staff.
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Our hospitals have contracted with the HealthTrust Group Purchasing Organization, a purchasing group used by a large number of community hospitals, for certain supplies and equipment. We promote communication among our hospitals and management teams so that local expertise and improvements can be shared among all of our facilities.
Expansion of Services and Facilities
We seek to add services at our hospitals on an as-needed basis in order to improve access to quality healthcare services in the communities we serve, with the ultimate goal of reducing the out-migration of patients to other hospitals or alternate service providers. Additional and expanded services and programs, which may include specialty inpatient and outpatient services, are often dependent on recruiting physicians; therefore, physician recruiting goals are important to our ability to expand services. Capital investments in technology and facilities are often necessary to increase the quality and scope of services provided to the communities. Additional and expanded services and improvements add to each hospitals quality of care and reputation in the community, reducing out-migration and increasing patient referrals and revenue. SunLink provides emergency room services in each of our hospitals. We seek to maintain a quality, patient-friendly emergency room because we view the emergency room as each facilitys window to the community and a critical component of its local service offering.
Medical Staff
The number and quality of physicians affiliated with a hospital directly affects the quality and availability of patient care and the reputation of the hospital. Physicians generally may terminate their affiliation with a hospital at any time. We seek to retain primary care physicians of varied physician specialties on the medical staffs of our hospitals and to attract other qualified physicians. SunLink believes physicians refer patients to a hospital primarily on the basis of the quality of services the hospital renders to patients and physicians; the quality of other physicians on the medical staff; the location of the hospital; and the quality of the hospitals facilities, equipment and employees. Accordingly, SunLink strives to provide quality facilities, equipment, employees and services for physicians and their patients.
Physician Recruiting
Each SunLink hospital management team is responsible for assessing the need for additional physicians, including the number and specialty of additional physicians needed by the hospitals community. Each of our local hospital management teams, with the assistance of outside recruiting firms and corporate staff, identifies and seeks to attract specific physicians to its hospitals medical staff. Increasingly, our hospitals have employed physicians, as we have sought to better align physician performance with hospital goals through employment relationships. Many hospitals and hospital systems are attempting to improve clinical and financial results by employing physicians. For newly recruited non-employed physicians, the hospital generally guarantees such physicians a minimum level of gross receipts during an initial period, generally of one year, and assists the physicians transition into the community. The physician is required to repay some or all of the amounts paid under such guarantee if the physician leaves the community within a specified period. Currently, 23 physicians are employed by our hospitals and three are under physician guarantee contracts. We continually evaluate each doctor and may terminate employment based on doctor performance and the needs of each facility. The Company believes physician recruiting has become more challenging and expects that such recruiting will continue to remain challenging due to various factors including healthcare reform and market forces. The Company believes the costs of recruiting and retaining physicians will increase as more physicians are employed and salaries and support costs increase.
Quality Assurance
Each SunLink hospital implements quality assurance procedures to monitor the level and quality of care provided to its patients. Each hospital has a medical director who supervises and is responsible for the quality of
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medical care provided and a medical advisory committee comprised of physicians who review the professional credentials of physicians applying for medical staff privileges at the hospital. The medical advisory committee also reviews and monitors surgical outcomes along with procedures performed and the quality of the logistical, medical and technological support provided to the physicians. Each hospital periodically conducts surveys of its patients, either during their stay at the hospital or subsequently by mail, to identify potential areas of improvement. Each SunLink hospital, except the leased hospital in Dexter, Missouri, is accredited by the Joint Commission of Accreditation of Healthcare Organizations, also known as JCAHO.
Operating Statistics
The following table sets forth certain operating statistics for SunLinks healthcare facilities included in continuing operations as of June 30 for the periods indicated.
Fiscal Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Hospitals owned or leased at end of period |
5 | 5 | 5 | |||||||||
Licensed hospital bed (at end of period) |
282 | 282 | 282 | |||||||||
Hospital beds in service (at end of period) |
223 | 223 | 223 | |||||||||
Nursing home beds in service (at end of period) |
166 | 166 | 166 | |||||||||
Admissions |
4,631 | 5,226 | 5,814 | |||||||||
Equivalent Admissions (1) |
16,345 | 16,118 | 17,511 | |||||||||
Average Length of Stay (2) |
3.5 | 3.5 | 3.6 | |||||||||
Patient days |
16,175 | 18,521 | 21,073 | |||||||||
Adjusted patient days (3) |
55,683 | 56,270 | 62,288 | |||||||||
Occupancy rate (% of licensed beds)(4) |
15.71 | % | 17.99 | % | 20.47 | % | ||||||
Occupancy rate (% of beds in service)(5) |
19.87 | % | 22.75 | % | 25.89 | % | ||||||
Net patient service revenues (in thousands) |
$ | 108,161 | $ | 114,460 | $ | 123,712 | ||||||
Net outpatient service revenues (in thousands) |
$ | 50,051 | $ | 52,712 | $ | 61,476 | ||||||
Net revenue per equivalent admissions |
$ | 6,617 | $ | 7,092 | $ | 7,065 | ||||||
Net outpatient service revenues (as a % of net patient service revenues) |
46.27 | % | 46.05 | % | 49.69 | % |
(1) |
Equivalent admissions are a statistic used by management (and certain investors) as a general approximation of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues. The equivalent admissions computation is intended to relate outpatient revenues to the volume measure (admissions) used to measure inpatient volume resulting in a general approximation of combined inpatient and outpatient volume. |
(2) |
Average length of stay is calculated based on the number of patient days divided by the number of admissions. |
(3) |
Adjusted patient days have been calculated based on a revenue-based formula of multiplying actual patient days by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues for each hospital. Adjusted patient days is a statistic (which is used generally in the industry) designed to communicate an approximate volume of service provided to inpatients and outpatients by converting total patient revenues to a number representing adjusted patient days. |
(4) | Percentages are calculated by dividing average daily census by the average number of licensed hospital beds. |
(5) |
Percentages are calculated by dividing average daily census by the average number of hospital beds in service. |
Sources of Revenue
Each SunLink hospital receives payments for patient care from federal Medicare programs, State Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider organizations,
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TriCare, and from employers and patients directly. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a federal-state program, administered by the states, that provides hospital and nursing home benefits to qualifying individuals who are unable to afford care. All of SunLinks hospitals are certified as healthcare services providers for persons covered by Medicare and Medicaid programs. TriCare is a federal program for the healthcare of certain U.S. military personnel and their dependants. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following table sets forth the percentage of patient days from various payors in SunLinks healthcare facilities for the periods indicated.
Fiscal Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Source |
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Medicare |
70.0 | % | 72.9 | % | 73.0 | % | ||||||
Medicaid |
10.4 | % | 10.2 | % | 9.3 | % | ||||||
Private and Other Sources |
19.6 | % | 16.9 | % | 17.7 | % | ||||||
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100.0 | % | 100.0 | % | 100.0 | % | |||||||
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The following table sets forth the percentage of the net patient revenues from major payors in SunLinks hospitals.
Fiscal Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Source |
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Medicare |
40.3 | % | 40.9 | % | 38.9 | % | ||||||
Medicaid |
13.1 | % | 12.6 | % | 11.6 | % | ||||||
Private and Other Sources |
46.6 | % | 46.5 | % | 49.5 | % | ||||||
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100.0 | % | 100.0 | % | 100.0 | % | |||||||
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Hospital revenues depend upon inpatient occupancy levels, the extent to which ancillary services and therapy programs are ordered by physicians and provided to patients, and the volume of outpatient procedures. Reimbursement rates for routine inpatient services vary significantly depending on the type of service (e.g., acute care, intensive care or psychiatric care) and the geographic location of the hospital. The percentage of patient revenues attributable to outpatient services has increased in recent years, primarily as a result of medical technology advances that allow more services to be provided on an outpatient basis and from increased pressures from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis.
Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid and some private insurer plans, health maintenance organization (HMO) plans and preferred provider organizations(PPO) plans, but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has been increasing in recent years. Collection of amounts due from individuals typically is more difficult than from governmental or third-party payors. Further, amounts received under the Medicare and Medicaid programs generally are significantly less than the established charges of most hospitals, including our own, for the services provided. Likewise, HMOs and PPOs generally seek and obtain discounts from the established charges of most hospitals. See Item 1. BusinessGovernment Reimbursement ProgramsMedicare/Medicaid Reimbursement.
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Competition
Among the factors which we believe influence patient selection among hospitals in our markets are:
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The appearance and functionality of the healthcare facilities; |
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The quality and demeanor of professional staff and physicians; and |
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The participation of the hospital in plans which pay a portion of the patients bill. |
Such factors are influenced heavily by the quality and scope of medical services, strength of referral networks, hospital location and the price of hospital services. Our hospitals may face less competition in their immediate patient service areas than would be expected in larger communities because they are the primary provider of healthcare services in their respective communities. However, our hospitals usually face competition from larger tertiary care centers and, in some cases, other rural, exurban, suburban or, in limited circumstances, urban hospitals, some of which offer more specialized services. The competing hospitals may be owned by governmental agencies or not-for-profit entities supported by endowments and charitable contributions and may be able to finance capital expenditures on a tax-exempt basis. Such governmental-owned and not-for-profit hospitals, as well as various for-profit hospitals operating in the broader service area of our hospitals, likely have greater access to financial resources than do our hospitals.
Managed Care
Each SunLink hospital is affected by its ability to negotiate service contracts with purchasers of group healthcare services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs. In addition, employers and traditional health insurers increasingly are seeking to contain costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group healthcare service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of medical staff, convenience and price.
The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Management believes that, on an industry basis, managed care contracts generally are less important in our markets than in urban and suburban markets where there is typically a higher level of managed care penetration. Nevertheless, a significant portion of hospital patients in our communities are covered by managed care or other reimbursement programs, all of which generally pay less than established charges for hospital services.
The healthcare industry as a whole faces the challenge of continuing to provide quality patient care while managing rising costs, facing strong competition for patients, and adjusting to a continued general reduction of reimbursement rates by both private and government payors. Both private and government payors continually seek to reduce the nature and scope of services which may be reimbursed. Healthcare reform at both the federal and state level generally has created pressure to reduce reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations, and competitive contracting for provider services by private and government payors, may require changes in our facilities, equipment, personnel, rates and/or services in the future.
Efforts to Control Healthcare Costs
The hospital industry, including all of SunLinks hospitals, continues to have significant unused capacity. Inpatient utilization, average lengths of stay and average inpatient occupancy rates continue to be affected negatively by payor-required pre-admission authorization, utilization review, and payment mechanisms designed to maximize outpatient and alternative healthcare delivery services for less acutely ill patients and to limit the cost of treating inpatients. Admissions constraints, payor pressures, and increased competition are likely to
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continue. Historically we have responded to such trends by adding and expanding outpatient services, upgrading facilities and equipment, offering new programs and adding or expanding certain inpatient and ancillary services. Currently we expect to continue to respond to such trends in a similar manner subject to the availability of capital resources and our evaluation of the continued utility of such historical responses.
Health Care Reform
The Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the Affordable Care Act or ACA) were signed into law by President Obama on March 23, 2010, and March 30, 2010, respectively. The ACA alters the United States health care system and is intended to decrease the number of uninsured Americans and reduce overall health care costs. The ACA attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance or pay a tax penalty, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments including disproportionate share payments, expanding the Medicare programs use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The ACA also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and generally prohibiting physician-owned hospitals from adding new physician owners or increasing the number of beds and operating rooms for which they are licensed. Because a majority of the measures contained in the ACA do not take effect until 2013 and 2014 and most of the rules and regulations that implement the provisions of the ACA have not been adopted or proposed, it is difficult to predict the impact the ACA will have on our facilities. However, it is possible that the implementation or interpretation of such rules and regulations or the provisions of the ACA could have an adverse effect on our financial condition and results of operations.
Government Reimbursement Programs
A significant portion of SunLinks healthcare facilities net revenues are dependent upon reimbursement from Medicare and Medicaid. The Centers for Medicare and Medicaid Services or CMS is the federal agency which administers Medicare, Medicaid and the Childrens Health Insurance Program (CHIP). Although the federal government generally reviews payment rates under its various programs annually, changes in reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the federal government which currently begins on October 1 and ends on September 30 of each year.
Medicare Inpatient Reimbursement
The Medicare program pays hospitals under the provisions of a prospective payment system for inpatient services. Under the inpatient prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as diagnosis related groups (DRGs). Each patient admitted for care is assigned to a DRG based upon his or her primary admitting diagnosis. Every DRG is assigned a payment rate by the government based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. DRG payments do not consider a specific hospitals costs, but are national rates adjusted for area wage differentials and case-mix indices.
DRG rates are usually adjusted by an update factor each federal fiscal year (FFY). The percentage increases to DRG payment rates for the last several years have been lower than the percentage increases in the related cost of goods and services provided by general hospitals. The index used to adjust the DRG payment rates is based on a price statistic, known as the CMS Market Basket Index, reduced by congressionally mandated reduction factors.
DRG rate increases were 2.35% and 1.1% for FFY 2011 and 2012, respectively, and currently is 2.8% for FFY 2013. The Balanced Budget Act of 1997 originally set the increase in DRG payment rates for future FFYs at
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rates that would be based on the market basket index, which in certain years have been, and in the future may be, subject to reduction factors. In FFY 2012 the market basket rate currently is affected by two such reduction factors. First as required by the Affordable Care Act, the market basket rate is reduced by 0.25%. Second, CMS is applying a documentation and coding adjustment to recoup a portion of excess aggregate payments in FFY 2008 and FY 2009 that did not reflect actual increases in patients severity of illness. Under legislation passed in 2007, CMS is required to recoup the entire amount of FFY 2008 and 2009 excess spending resulting from changes in hospital coding practices no later than FFY 2012. If the update factor does not adequately reflect increases in SunLinks cost of providing inpatient services, our financial condition or results of operations could be negatively affected.
The ACA made a number of changes to Medicare which include but are not limited to:
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Reduction of market basket updates in Medicare payment rates for providers including to incorporate adjustment for expected productivity gains. The market basket was reduced by 0.25% for both FFY 2010 and 2011, and will be reduced by 0.10% in FFYs 2012 and 2013, by 0.30% in FFY 2014, by 0.20% in 2015 and 2016, and by 0.75% in FFYs 2017-2019. |
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Reduction of Medicare payments that would otherwise be made to hospitals by specified percentages to account for preventable hospital readmissions, effective October 1, 2012. |
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Extension of the Medicare Dependent Hospital Program until September 30, 2012. |
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Expansion, on a temporary basis, of the low volume hospital inpatient payment adjustment to include hospitals that are more than 15 miles from other healthcare facilities and have less than 1,600 discharges per year. The new temporary criteria are effective for FFYs 2011 and 2012. Effective FFY 2013 and forward, the low-volume hospital definition and payment adjustment methodology will return to the pre-FFY 2011 definition and methodology. |
Each of SunLinks hospitals is an eligible hospital under one or more provisions of ACA.
Medicare Outpatient Reimbursement
Most outpatient services provided by general hospitals are reimbursed by Medicare under the outpatient prospective payment system. This outpatient prospective payment system is based on a system of Ambulatory Payment Classifications (APC). Each APC is designed to represent a bundle of outpatient services, and each APC is assigned a fully prospective reimbursement rate. Medicare pays a set price or rate for each APC group, regardless of the actual cost incurred in providing care. Each APC rate generally is subject to adjustment each year by an update factor based on a market basket of services index. For calendar years 2010, 2011 and 2012 the update factors were 2.1%, 2.6% and 3.0% respectively. If the update factor does not adequately reflect increases in SunLinks cost of providing outpatient services, our financial condition or results of operations could be negatively affected.
Medicare Bad Debt Reimbursement
Under Medicare, the costs attributable to the deductible and coinsurance amounts that remain unpaid by Medicare beneficiaries can be partially added to the Medicare share of allowable costs as cost reports are filed. Hospitals generally receive interim pass-through payments during the cost report year which were determined by the respective Medicare Auditor Contractor (MAC) from the prior cost report filing.
Bad debts must meet the following criteria to be allowable:
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the debt must be related to covered services and derived from deductible and coinsurance amounts; the provider must be able to establish that reasonable collection efforts were made; |
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the debt was actually uncollectible when claimed as worthless; and |
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sound business judgment established that there was no likelihood of recovery at any time in the future. |
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Amounts uncollectible from specific beneficiaries are charged off as bad debts in the accounting period in which the accounts are deemed to be worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs is reduced by 30%. Under this program, our hospitals received an aggregate of approximately $1,261, $1,442 and $1,765 for 2011, 2010 and 2009, respectively.
Medicare Disproportionate Share Payments
In addition to the standard DRG payment, the Social Security Act requires that additional Medicare payments be made to hospitals with a disproportionate share of low income patients. Beneficiary Improvement and Protection Act (BIPA) provisions, effective for services provided on and after April 1, 2001, stipulate that rural facilities with fewer than 100 beds with a disproportionate share percentage greater than 15% will be classified as a disproportionate share hospital entitled to receive a supplemental disproportionate share payment based on gross DRG payments. Since April 1, 2004, the effective rate has been 12.0% of DRG payments. All of our hospitals were classified as disproportionate share hospitals at June 30, 2012. Furthermore, the Affordable Care Act provides for material reductions in Medicare DSH funding. However, we estimate that Medicare disproportionate share payments represented only approximately 1% of our net patient service revenues for the years ended June 30, 2012, 2011 and 2010.
Medicaid Inpatient and Outpatient Reimbursement
Each state operates a Medicaid program funded jointly by the state and the federal government. federal law governs the general management of the Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit local needs and resources. As a result, each state Medicaid plan has its own payment formula and recipient eligibility criteria.
In the recent past, the various states in which SunLink operates hospitals have initiated increased efforts to reduce Medicaid assistance payments. These efforts and reductions often are triggered by one or more of the following factors: an increased effort by CMS to decrease the federal share of payments for Medicaid beneficiaries or significant increases in program utilization resulting from increased enrollment or budgetary pressures on the applicable states. The federal governments percentage share of each states medical assistance expenditures under Medicaid is determined by a formula specified in Medicaid law referred to as the federal Medical Assistance Percentage (FMAP).
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (ARRA) This law provides a temporary increase in the state FMAPs during a 9-calendar quarter recession adjustment period retroactively beginning October 1, 2008 and ending December 31, 2010.
Traditionally under the Medicaid law, each states FMAP is determined by a formula based on the relationship of each states per capita income to the national per capita income; the lower a states per capita income, the higher its FMAP. The FMAP is determined for each fiscal year and applies for states expenditures during that fiscal year. As a result of the temporary ARRA increase in the FMAP, reductions in Medicaid programs which were scheduled to take effect on July 1, 2009 in various states where SunLink operates were postponed until January 1, 2011.
The State of Georgia, where SunLink operates three hospitals, has begun initiatives to decrease the Medicaid funds paid to providers. Georgia Medicaid pays providers for inpatient services in a manner similar to the Medicare prospective payment system in that hospitals receive a fixed fee for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, also known as DRGs. These Medicaid DRG payments do not consider a specific hospitals costs, but are statewide rates adjusted for each hospitals capital cost allotment.
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Medicaid outpatient services are reimbursed with interim rates based on a facility specific cost to charge ratio. These interim payments are then adjusted subsequent to the end of the cost reporting period to an amount equal to 85.6% of the costs associated with providing care to the Medicaid outpatient population.
In 2006, Georgia implemented a Medicaid HMO program and awarded contracts to private companies for the management and processing of certain Medicaid claims. The intent of the Medicaid HMO program is to curtail utilization and reduce rates paid by the State of Georgia. All of SunLinks facilities that operate in the state of Georgia have secured contracts with all the HMO companies contracted by the state in their respective regions. Since the implementation of the Medicaid HMO program, all SunLink hospitals receive reimbursement from three different contractors instead of a single source. While the amounts of the inpatient payments have not changed since the contractors utilize the same payment rates, the timing of the receipt of the payments has changed due to the multiple payors. For outpatient services, our hospitals have contracts with the three HMO vendors and services are reimbursed at 102% of the current interim rate as determined by the Georgia Department of Community Health.
Adoption of Electronic Health Records
Electronic Health Records (EHR) incentive reimbursements are payments received under the Health Information Technology for Economic and Clinical Health Act (the HITECH Act) which was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. Beginning with federal fiscal year 2011 (federal fiscal year is October 1 through September 30) and extending through federal fiscal year 2016, eligible hospitals and critical access hospitals (CAH) participating in the Medicare and Medicaid programs are eligible for reimbursement incentives based on successfully demonstrating meaningful use of their certified EHR technology. Conversely, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to payment penalties or downward adjustments to their Medicare payments beginning in federal fiscal year 2015.
The Company accounts for EHR incentive payments in accordance with ASC 450-30, Gain Contingencies (ASC 450-30). In accordance with ASC 450-30, the Company recognizes a gain for EHR incentive payments when its eligible hospitals have demonstrated meaningful use of certified EHR technology for the applicable period and when the cost report information needed for the full cost report year used for the final calculation of the EHR incentive reimbursement payment is available. The demonstration of meaningful use is based on meeting a series of objectives and varies among hospitals, between the Medicare and Medicaid programs, and within the Medicaid program from state to state. Additionally, meeting the series of objectives in order to demonstrate meaningful use becomes progressively more stringent as its implementation is phased in through stages as outlined by the Centers for Medicare and Medicaid Services.
Attestation of Medicare meaningful use requirements for the first year (October 1, 2010 September 30, 2011) began on April 18, 2011. Each of SunLinks five hospitals and Memorial and Chilton registered for the program with CMS and on April 18, 2011 all successfully attested compliance with Part I of the Medicare EHR incentive program for such first year. The Company received $6,597 in EHR Medicare incentive reimbursements for the five hospitals and $1,134 and $790 for Memorial and Chilton, respectively, for the Companys fiscal year ended June 30, 2011.
The Company has also successfully attested to the meaningful use requirements for Medicaid program for each of its five hospitals and Memorial and Chilton. The Company recognized Medicaid EHR reimbursement for its Georgia and Missouri hospitals in the amount of $1,437 and for Memorial and Chilton in the amounts of $454 and $188, respectively, for the fiscal year end June 30, 2012. The Company recognized Medicaid EHR reimbursement for its Mississippi hospital in the amount of $277 for the Companys fiscal year ended June 30, 2011.
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We intend to continue to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for all available incentive payments. We believe our compliance will result in significant costs including professional services focused on successfully designing and implementing our EHR solutions along with costs associated with the hardware and software components of the project. As a result of our prior expenditures on information technology systems, our previously existing information technology systems already possessed certain components required for meaningful use of EHR technology. We continue to refine our budgeted costs and the expected reimbursement associated with our use of EHR technology. We currently estimate that, at a minimum, the incremental total costs and capital expenditures incurred to comply with the EHR regulations will be recovered through improved reimbursement amounts over the projected lifecycle of our EHR technology initiative, although such incremental costs and capital expenditures, have to a great degree, predated the reimbursements.
Government Reimbursement Program Administration and Adjustments
The Medicare, Medicaid and TriCare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and changing governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments under such programs.
All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet certain financial reporting requirements. federal and, where applicable, state regulations require the submission of annual cost reports covering the revenues, costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.
Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits which may result in adjustments to the amounts ultimately determined to be due under these reimbursement programs. These audits often require several years to reach the final determination of amounts due. Providers have rights of appeal and it is common to contest issues raised in audits of prior years cost reports. Although the final outcome of these audits and the nature and amounts of any adjustments are difficult to predict, we believe that we have made adequate provisions in our financial statements for adjustments that may result from these audits and that final resolution of any contested issues should not have a material adverse effect upon our financial condition or results of operations. Until final adjustment, however, significant issues may remain unresolved and previously determined allowances could become either inadequate or greater than ultimately required.
In 2005, CMS began using recovery audit contractors (RACs) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private companies to examine Medicare claims filed by healthcare providers. The RAC program was made permanent by the Tax Relief and Health Care Act of 2006 will gradually roll-out in additional states. The Affordable Care Act expands the RAC programs scope to include managed Medicare and to include Medicaid claims beginning June 1, 2010, and by requiring all states to establish programs to contract with RACs in 2011. Currently all states where SunLink operates have RAC programs, and all SunLink facilities have had requests from the various RACs to review claims. To date since the commencement of the RAC program SunLink has experienced losses in the aggregate from audit adjustments of approximately $318.
RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims review strategies used by RACs generally include a review of high dollar claims, including inpatient hospital claims. As a result, a large majority of the total amounts recovered by RACs has come from hospitals. Claims identified as overpayments will be subject to the Medicare appeals process.
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RACs are paid a contingency fee based on the overpayments they identify and collect. We expect that the RACs will continue to look closely at claims submitted by our facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict the results of any future RAC audits.
In addition, CMS employs Medicaid Integrity Contractors (MICs) to perform post-payment audits of Medicaid claims and identify overpayments. The Affordable Care Act increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to RACs and MICs, the state Medicaid agencies and other contractors have also increased their review activities.
If SunLink or any of our facilities were found to be in violation of federal or state laws relating to Medicare, Medicaid or similar programs, the facility and SunLink could be subject to substantial monetary fines, civil penalties and exclusion from future participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on our financial condition or results of operations.
SPECIALTY PHARMACY OPERATIONS
Our Specialty Pharmacy Segment is operated through our SunLink ScriptsRx, LLC subsidiary and is a pharmacy operations segment composed of four material service lines:
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Specialty Pharmacy Services which ordinarily include one or more of the following elements: |
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The provision of products relating to infusion therapy, enteral feeding services, oncology and chemotherapy drug administration, cardiac, diabetes, pain management, wound care, and psychiatric services; |
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Pharmaceutical or biological products administered via non-oral means, which are frequently through injectable or infusion therapies; |
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Products delivered to patients via express package or hand delivery and requiring special handling such as constant refrigeration or having an extremely limited shelf life; |
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Products that generally are administered in a non-hospital setting, including physicians offices, specialty clinics or patient homes; |
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The provision of pharmaceuticals or biological products not managed under traditional outpatient prescription drug benefits; and |
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Therapies that require complex care, patient education and continuous monitoring. |
The major conditions these drugs treat include, but are not limited to: respiratory system weakness, cancer, HIV/AIDS, hemophilia, hepatitis C, multiple sclerosis, infertility, Crohns disease, rheumatoid arthritis, and growth hormone deficiency.
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Institutional Pharmacy Services, consisting of the provision of specialty and non-specialty pharmaceuticals and biological products to institutional clients or to patients in institutional settings such as nursing homes, hospices, and correctional facilities; |
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Durable Medical Equipment Services, consisting primarily of products for patient-administered home care such as oxygen concentrator services, continuous positive airway pressure or CPAP machines, nebulizers, diabetes management products and prosthetics; |
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Retail Pharmacy Products and Services, consisting primarily of walk-in sales at our three distribution facilities in Louisiana of complementary products including uniforms, non-specialty pharmaceuticals, vitamins, supplements and nutritionals. We view our retail pharmacy operations as a source of incremental revenue to us while providing value added service to our patients in the form of full service pharmacy offerings. |
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Certain of the service lines in our Specialty Pharmacy Segment may overlap with our healthcare operations. Likewise, institutional pharmacy services may overlap with pharmacies in our healthcare facilities.
Government Reimbursement Programs
Our Specialty Pharmacy Business is subject to certain rules implemented by the Medicare Modernization Act (MMA) and, in the future may be subject to other rules previously implemented by MMA with respect to urban providers. Regulations implementing cost containment mandates under MMA reduced the reimbursement for healthcare providers in urban areas for a number of products and services which are also provided by our pharmacy operations and established a competitive bidding program for certain durable medical equipment provided under Medicare Part B in urban areas. Competitive bidding is intended to further reduce reimbursement for certain products and will likely decrease the number of companies permitted to serve Medicare beneficiaries in the competitive bidding areas (CBAs). CMS had planned to implement the competitive bidding program for Medicare durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) products and services with the goal of offering beneficiaries access to quality with lower out-of-pocket costs. We were exempted under the Deficit Reduction Act of 2005 from the proposed competitive acquisition program for DMEPOS, but we cannot be sure such exemption will continue to be available in the future or that the program, if expanded in the future, would be expanded in its original form. If the program is expanded in the future, loss of the exemption could have an adverse effect on our financial condition or results of operation. The program has, however, been deferred indefinitely, and whether or not the program will be implemented in the future is unknown.
The MMA also created a Medicare prescription drug benefit (which began in 2006) and a prescription drug card program. Final rules implementing the portions of the MMA relating to the new prescription drug benefit were adopted in 2005.
Under MMA Medicare Part B covered drugs and biological products generally are paid based on the average sales price (ASP) methodology. The ASP methodology uses quarterly drug pricing data submitted to the CMS by drug manufacturers. CMS will supply contractors with the ASP drug pricing files for Medicare Part B drugs on a quarterly basis. Principal products paid under the ASP methodology include certain oncology and renal dialysis drugs. Although, there are exceptions to this general rule which are listed in the latest ASP quarterly change request (CR) document and which exceptions generally are paid on a cost basis, such exceptions have not been and are not expected to be material to our operations.
Beginning in January 2008, CMSs outpatient prospective payment system began paying for most separately payable Medicare Part B drugs administered in a hospital outpatient setting at a reimbursement level of ASP plus 5% and ASP plus 6% in other settings. Such outpatient price represented a decrease from ASP + 6%.
Section 303(d) of the MMA also requires the implementation of a competitive acquisition program (the Part B CAP) for Medicare Part B drugs and biologicals not paid on a cost or prospective payment system basis. The Part B CAP is an alternative to the ASP methodology for acquiring certain Part B drugs which are administered incident to a physicians services. Currently, the Part B CAP is a voluntary program that offers physicians the option to acquire many injectable and infused drugs they use in their practice from an approved Part B CAP vendor, thus reducing the time and cost of buying and billing for drugs. Currently, the CAP for Part B Drugs and Biologicals is only for injectable and infused drugs currently billed under Part B that are administered in a physicians office, incident to a physicians service.
In late 2005, CMS conducted the first round of bidding for approved Part B CAP vendors. The Part B CAP was implemented on July 1, 2006. The 2009-2011 CAP vendor bidding period concluded on February 15, 2008. CMS received several qualified bids; however, contractual issues with the successful bidders resulted in the 2009 program being postponed by CMS in September 2008. As a result, CAP drugs were not available from an approved CAP vendor for dates of service after December 31, 2008.
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At least one Medicaid program has adopted, and other Medicaid programs, some states and some private payors may be expected to adopt, those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of ASP as the measure for determining reimbursement by Medicare and Medicaid programs for additional drugs sold by our specialty pharmacy operations could reduce revenue and gross margins and could materially affect our current average wholesale price (AWP) based reimbursement structure with private payors.
We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our specialty pharmacy operations or that we will be able to operate our specialty pharmacy operations profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which we operate, or may seek to operate, in particular or that we would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.
Competition
There are many companies which provide one or more of the healthcare operations which comprise or may compete with our pharmacy operations. For example, home healthcare business companies, which may compete with our specialty pharmacy services, our durable medical equipment services operations or both, range in size from small entrepreneurial companies to rapidly expanding companies with strategies for national operations such as Amedisys, Inc., Apria Healthcare Group, Inc., Gentiva Health Services, Inc., and Walgreen Co. Specialty pharmacy companies range from local or regional pharmacies to large public companies such as Option Care, Inc., a subsidiary of Walgreen Co., CVS Caremark Corporation, Priority Healthcare Corporation and BioScrip, Inc. Institutional pharmacy companies likewise range from local or regional pharmacies to large public companies including PharMerica Corporation and Omnicare, Inc.
Healthcare Regulation
Overview
The healthcare industry is one of the largest industries in the United States and continues to attract much legislative interest and public attention. There are many factors that are highly significant to the healthcare industry including Medicare, Medicaid, and other public and private hospital cost-containment programs, proposals to limit healthcare spending and proposals to limit prices and increase industry competition. The healthcare industry is governed by an extremely complex framework of federal, state and local laws, rules and regulations.
There continue to be federal and state proposals that would, and actions that do, impose limitations on government and private payments to providers, including community hospitals. In addition, there regularly are proposals to increase co-payments and deductibles from program and private patients. Hospital facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as utilization review. Utilization review entails the review of a patients admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in connection with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.
Many states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include
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coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.
Healthcare Facility Regulation
Certificate of Need Requirements
A number of states require approval for the purchase, construction or expansion of various healthcare facilities, including findings of need for additional or expanded healthcare facilities or services. Certificates of Need (CONs), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. All three states in which SunLink currently operates hospitals (Georgia, Mississippi and Missouri) have CON laws that apply to such facilities. The two states (Georgia and Mississippi) in which SunLink currently operates nursing homes/skilled nursing facilities also have CON laws that apply to nursing homes and other skilled nursing facilities. States periodically review, modify and revise their CON laws and related regulations.
In addition, future healthcare facility acquisitions also may occur in states that require CONs. SunLink is unable to predict whether its healthcare facilities will be able to obtain any CONs that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required. Violation of these state laws may result in the imposition of civil sanctions or the revocation of licenses for such facilities.
Future healthcare facility acquisitions also may occur in states that do not require CONs or which have less stringent CON requirements than the states in which SunLink currently operates healthcare facilities. Any healthcare facility operated by SunLink in such states may face increased competition from new or expanding facilities operated by competitors, including physicians.
Utilization Review Compliance and Hospital Governance
SunLinks healthcare facilities are subject to, and comply with, various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a peer review organization to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees of staff doctors at each healthcare facility; are overseen by each healthcare facilitys local governing board, the primary voting members of which are physicians and community members; and are reviewed by SunLinks quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.
Emergency Medical Treatment and Active Labor Act
All of our facilities are subject to the Emergency Medical Treatment and Active Labor Act (EMTALA). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents himself to the hospitals emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patients ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patients ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition, an injured patient, the patients family or a medical facility that suffers a financial loss as a direct result of another hospitals violation of the law can bring a civil suit against that other hospital. Although we believe that our hospitals comply with EMTALA, we cannot predict
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whether CMS will implement new requirements in the future and whether we will be able to comply with any new requirements.
Conversion Legislation
Many states, including some where we have hospitals and others where we may in the future acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, state attorneys generally have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes, can add additional time to the closing of a hospital acquisition. There can be no assurance that future actions on the state level will not seriously delay or even prevent our ability to acquire hospitals. If these activities are widespread, they could limit our ability to acquire additional hospitals or increase our acquisition costs.
Specialty Pharmacy Segment Regulation
Overview
Much like our healthcare facility operations, the operations of our Specialty Pharmacy Segment are subject to various federal and state statutes and regulations governing their operations including laws and regulations with respect to operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, cross jurisdictional sale and distribution of pharmacy products, medical waste disposal, clinical trials and non-discriminatory access. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs as well as the dispensing of controlled substances. Federal controlled substance laws require us to register our pharmacies and repackaging facilities with the United States Drug Enforcement Administration (DEA) and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances. Although we believe that the operations of our Specialty Pharmacy Segment have obtained the permits and/or licenses required to conduct our specialty pharmacy business as currently conducted, a failure to have the necessary permits and licenses could have a material adverse effect on our specialty pharmacy business, and our financial condition or results of operations.
Mail Order Activities
Currently the activities of our hospital pharmacies are ancillary to the operations of the facilities they serve. In contrast, the operations of our specialty pharmacy services operations are stand-alone operations that, in addition to walk-in customers, distribute pharmaceuticals through a variety of delivery methods, including by mail and express delivery services. Many states in which we deliver or may seek to deliver pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located.
However, various state Medicaid programs have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to our operations, we believe our specialty pharmacy operations comply with them in all material respects. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to our specialty pharmacy operations, they could have an adverse effect on our ability to expand our pharmacy operations, which currently are concentrated in Louisiana. A number of state Medicaid programs prohibit the participation in such states Medicare program by either out-of-state retail pharmacies or mail order pharmacies, whether located in-state or out-of-state.
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Advertising and Marketing Regulations
There are also other statutes and regulations which may affect advertising, marketing and distribution of pharmacy products by our specialty pharmacy services. The federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds when appropriate.
Healthcare Regulations of General Application
Licensing Requirements
SunLinks healthcare operations are subject to extensive federal, state and local licensing requirements. In order to maintain their operating licenses, our healthcare facility operations must comply with strict standards concerning medical care, equipment and hygiene. Various licenses and permits also are required in order to handle radioactive materials and operate certain equipment. All licenses, provider numbers, and other permits or approvals required to perform our business operations are held by individual subsidiaries of SunLink. Each of our hospital operating subsidiaries operates only a single hospital. All of SunLinks hospitals, except the leased hospital in Dexter, Missouri, are fully accredited by the JCAHO.
Drugs and Controlled Substances
Various licenses and permits are required by our healthcare facilities and specialty pharmacy business in order to dispense narcotics and operate pharmacies. We are required to register our pharmacy operations for permits and/or licenses with, and comply with certain operating and security standards of, the United States DEA, the Food and Drug Administration, or FDA, State Boards of Pharmacy, state health departments and other state agencies in states where we operate or may seek to operate.
State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the states pharmacy licensing authority. Such standards often address the qualification of an applicants personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of our dispensing locations must also satisfy applicable state licensing requirements.
Fraud and Abuse, Anti-Kickback and Self-Referral Regulations
Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a hospital fails to comply substantially with the numerous federal laws governing a facilitys activities, the hospitals participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it:
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makes claims to Medicare and/or Medicaid for services not provided or misrepresents actual services provided in order to obtain higher payments; |
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pays money to induce the referral of patients or the purchase of items or services where such items or services are reimbursable under a federal or state health program; |
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fails to report or repay improper or excess payments; or |
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fails to provide appropriate emergency medical screening services to any individual who comes to a hospitals campus or otherwise fails to properly treat and transfer emergency patients. |
Hospitals continue to be one of the primary focus areas of the Office of the Inspector General (OIG) of the United States and other governmental fraud and abuse programs. In January 2005, the OIG issued Supplemental
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Compliance Program Guidance for Hospitals that focuses on hospital compliance risk areas. Some of the risk areas highlighted by the OIG include correct outpatient procedure coding, revising admission and discharge policies to reflect current CMS rules, submitting appropriate claims for supplemental payments such as pass-through costs and outlier payments and a general discussion of the fraud and abuse risks related to financial relationships with referral sources. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to the programs and operations of Department of Health and Human Services (HHS) and details the areas that the OIG believes are prone to fraud and abuse.
Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the anti-kickback statute, prohibit certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicare, Medicaid, TriCare or other healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future participation in government programs, such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, HHS issued regulations that create safe harbors under the anti-kickback statute. A given business arrangement that does not fall within an enumerated safe harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are subject to increased scrutiny by enforcement authorities.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. These laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a federal or state healthcare program. Finally, HIPAA established enforcement mechanisms to combat fraud and abuse. These mechanisms include a bounty system where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs.
There is increasing scrutiny by law enforcement authorities, the OIG, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.
In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for services referred, in violation of the Stark Act is subject to civil monetary penalties of up to $15 for each service; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare program, which can subject the person or entity to exclusion from future participation in state healthcare programs.
Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and
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the physician directly makes referrals to such entity, then such physician or entity could be subject to a civil monetary penalty of up to $100. In addition, the monitoring of compliance with and the enforcing of penalties for violations of these laws and regulations is changing and increasing. For example, in 2010, CMS issued a self-referral disclosure protocol for hospitals and other providers that wish to self-disclose potential violations of the Stark Act and attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. In light of the provisions of the Affordable Care Act that created potential liabilities under the federal False Claims Act (discussed below) for failing to report and repay known overpayments and return an overpayment within sixty (60) days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later, hospitals and other healthcare providers are encouraged to disclose potential violations of the Stark Act to CMS. It is likely that self-disclosure of Stark violations will increase in the future. Finally, many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care.
The federal False Claims Act and Similar State Laws
The federal False Claims Act prohibits providers from, among other things, knowingly submitting false or fraudulent claims for payment to the federal government. The False Claims Act defines the term knowingly broadly, and while simple negligence generally will not give rise to liability, submitting a claim with reckless disregard to its truth or falsity can constitute the knowing submission of a false or fraudulent claim for the purposes of the False Claims Act. The qui tam or whistleblower provisions of the False Claims Act allow private individuals to bring actions under the False Claims Act on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of whistleblower lawsuits that have been filed against providers has increased significantly in recent years. When a private party brings a qui tam action under the False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. If a provider is found to be liable under the False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties of between $5 to $11 for each separate false claim. The government has used the False Claims Act to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, submitting false cost reports, and providing care that is not medically necessary or that is substandard in quality.
HIPAA Transaction, Privacy and Security Requirements
HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that have required us to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and privacy of patient healthcare information and ensure the security of healthcare information.
A violation of the HIPAA regulations could result in civil money penalties of $1 per incident, up to a maximum of $25 per person, per year, per standard violated. HIPAA also provides for criminal penalties of up to $50 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100 and five years in prison for obtaining protected health information under false pretenses and up to $250 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is no significant history of enforcement efforts by the federal government at this time, it is not possible to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.
HIPAA Privacy Regulations
HIPAA privacy regulations protect the privacy of individually identifiable health information. The regulations provide increased patient control over medical records, mandate substantial financial penalties for
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violation of a patients right to privacy and, with a few exceptions, require that an individuals individually identifiable health information only be used for healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our facilities, that transmit health information in an electronic form in connection with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our facilities and require compliance with rules governing the use and disclosure of such health information, and they require our facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on behalf of our facilities. In addition, our facilities are subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose stricter standards and additional penalties.
The HIPAA privacy regulations also require healthcare providers to implement and enforce privacy policies to ensure compliance with the regulations and standards. Under the direction of SunLinks Vice President, Technical and Compliance Services, and in conjunction with a private HIPAA consultant and HIPAA coordinators at each facility, individually tailored policies and procedures were developed and implemented and HIPAA privacy educational programs were presented to all employees and physicians at each facility prior to the compliance deadline. We believe we are in compliance with current HIPAA privacy regulations.
HIPAA Electronic Data Standards
The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require healthcare facilities to use standard data formats and code sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.
The HHS regulations establish electronic data transmission standards that all healthcare providers and payors must use when submitting and receiving certain electronic healthcare transactions. The uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data clearinghouses and simplifying the interface programs necessary to perform this function. We believe that the management information systems at our facilities and at our corporate headquarters comply with HIPAAs electronic data regulations and standards.
HIPAA Security Standards
The Administrative Simplification Provisions of HIPAA require the use of a series of security standards for the protection of electronic health information. The HIPAA security standards rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are delineated into either required or addressable implementation specifications.
Under the direction of SunLinks Vice President, Technical and Compliance Services, and in conjunction with a consortium of rural hospitals, private HIPAA security consultants and HIPAA security officers at each facility, we have performed security assessments, and implemented individually tailored plans to apply required or addressable solutions and implemented a set of security policies and procedures. In addition, we developed and adopted an individually tailored comprehensive disaster contingency plan for each facility and presented a HIPAA security training program to all applicable personnel. SunLink believes it is in full compliance with all aspects of the HIPAA security regulations.
HIPAA National Provider Identifier
HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic
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transactions. All healthcare providers, including our facilities, were required to obtain a new National Provider Identifier (NPI) to be used in standard transactions instead of other numerical identifiers by May 23, 2007. Our facilities have fully implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant, but cannot predict the impact of such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers. HHS is currently working on the standards for identifiers for health plans; however, there are currently no proposed timelines for issuance of proposed or final rules. The issuance of proposed rules for individuals is on hold indefinitely.
ICD-10 Coding System
The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. HHS has issued regulations implementing the HIPAA Administrative Simplification Provisions and compliance with these regulations is mandatory for our facilities. In January 2009, CMS published a final rule regarding updated standard code sets for certain diagnoses and procedures known as ICD-10 code sets and related changes to the formats used for certain electronic transactions. While use of the ICD-10 code sets is not mandatory until October 1, 2014, we will be modifying our payment systems and processes to prepare for the implementation. The ICD-10 code sets will require significant administrative changes, but we believe that the cost of compliance with these regulations has not had, and is not expected to have, a material adverse effect on our cash flows, financial position or results of operations. The Health Reform Law requires HHS to adopt standards for additional electronic transactions and to establish operating rules to promote uniformity in the implementation of each standardized electronic transaction.
Medical Waste Regulations
Our operations, especially our healthcare facility operations, generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations are also generally subject to various other environmental laws, rules and regulations. Such compliance costs are not significant and we do not anticipate that such compliance costs will be significant in the future.
SUNLINK OPERATIONS
Regulatory Compliance Program
SunLink maintains a company-wide compliance program under the direction of our Director of Risk Management. SunLinks compliance program is directed at all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, as well as pharmacy and home healthcare operations. Each hospital designates a compliance officer and develops plans to correct problems should they arise. In addition, all employees are provided with a copy of and given an introduction to SunLinks Code of Conduct , which includes ethical and compliance guidelines and instructions about the proper resources to utilize in order to address any concerns that may arise. Each hospital conducts annual training to re-emphasize SunLinks Code of Conduct . We monitor our corporate compliance program to respond to developments in healthcare regulations and the industry. SunLink also maintains a toll-free hotline to permit employees to report compliance concerns on an anonymous basis.
Professional Liability
As part of our business, we are subject to claims of liability for events occurring in the ordinary course of operations. To cover a portion of these claims, we maintain professional malpractice liability insurance and
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general liability insurance in amounts, which are commercially available, that we believe are sufficient for our operations, although some claims may exceed the scope or amount of the coverage in effect.
In connection with the acquisition of our initial six community hospitals, SunLink assumed responsibility for general and professional liability claims reported after February 1, 2001 (our acquisition date of such hospitals), and the previous owner retained responsibility for all known and filed claims. We have purchased claims-made commercial insurance (with a substantial self-insured retention) for coverage prior to and after the acquisition date. The recorded liability for general and professional liability risks includes an estimate of the liability for claims incurred prior to February 1, 2001, but reported after February 1, 2001 and for claims incurred after February 1, 2001. In connection with the acquisition of HealthMont and its two hospitals, SunLink assumed responsibility for all professional liability claims. HealthMont had purchased claims-made commercial insurance for claims made prior to the acquisition. The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition. These estimates are based on actuarially determined amounts.
Environmental Regulation
We believe we are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to the protection of the environment have not had a material effect upon our consolidated results of operations, consolidated financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with such regulations.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, as of September 20, 2012, their positions with the Company or its subsidiaries and their ages are as follows:
Name |
Offices |
Age | ||||
Robert M. Thornton, Jr. |
Director, Chairman of the Board of Directors, President and Chief Executive Officer |
63 | ||||
Mark J. Stockslager |
Chief Financial Officer and Principal Accounting Officer |
53 | ||||
A. Ronald Turner |
Chief Operating Officer |
66 | ||||
Byron D. Finn |
President SunLink ScriptsRx, LLC |
62 | ||||
Jack M. Spurr, Jr. |
Vice President, Hospital Financial Operations |
67 |
All of our executive officers hold office for an indefinite term, subject to the discretion of the Board of Directors.
Robert M. Thornton, Jr. has been Chairman and Chief Executive Officer of SunLink Health Systems, Inc. since September 10, 1998, President since July 16, 1996 and was Chief Financial Officer from July 18, 1997 to August 31, 2002. From March 1995 to the present, Mr. Thornton has been a private investor in and Chairman and Chief Executive Officer of CareVest Capital, LLC, a private investment and management services firm. Mr. Thornton was President, Chief Operating Officer, Chief Financial Officer and a director of Hallmark Healthcare Corporation (Hallmark) from November 1993 until Hallmarks merger with Community Health Systems, Inc. in October 1994. From October 1987 until November 1993, Mr. Thornton was Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director of Hallmark.
Mark J. Stockslager has been Chief Financial Officer of SunLink Health Systems, Inc. since July 1, 2007. He was interim Chief Financial Officer from November 6, 2006 until June 30, 2007. He has been the Principal Accounting Officer since March 11, 1998 and was Corporate Controller from November 6, 1996 to June 4, 2007. He has been associated continuously with our accounting and finance operations since June 1988 and has held various positions, including Manager of U.S. Accounting, from June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was employed by Price Waterhouse & Co.
A. Ronald Turner was named Chief Operating Officer of SunLink on November 30, 2010. Mr. Turner is an entrepreneur, experienced hospital management company executive and CPA who worked as an independent management consultant for sixteen months prior to joining SunLink. Mr. Turner co-founded Associated Healthcare Systems, Inc. and served as its President and CEO from April 1999 to December 2009. From July 1985 to April 1999, Mr. Turner was a private investor and management consultant who, among other things, led the merger, acquisition and financing activities for a number of hospital and other healthcare industry transactions. Mr. Turner served as the President and Chief Operating Officer of Health Group Inc. from August 1982 to July 1985. Mr. Turner co-founded Southern Health Services, Inc. and served as its President, Chief Operating Officer and a director from December 1978 to August 1982. Prior to December 1978, Mr. Turner practiced as a CPA in Arthur Young & Companys National Healthcare Group and with Ernst & Whinney.
Byron D. Finn was named President of SunLink ScriptsRx, LLC on October 1, 2010. Mr. Finn was most recently president of Byron D. Finn, CPA, PC, which provided accounting, financial consulting and litigation support services to its clients, including numerous healthcare clients. His experience also includes various positions with The Coca-Cola Company, where he served in a number of financial-related positions and in connection with special projects, and he was previously employed by Ernst & Young. Mr. Finn is a licensed CPA and received his BA in Business Administration and Master in Accountancy degrees from the University of Georgia.
Jack M. Spurr, Jr. has been Vice President, Hospital Financial Operations for the Company since October 1, 2002. From February 1, 2001 until September 30, 2002, Mr. Spurr performed several interim financial roles for
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the Company. From 1978 to 2000, Mr. Spurr held financial positions with Hospital Corporation of America, Columbia Healthcare, Inc., Quorum Health Group, Inc., HealthTrust, Inc., and National Healthcare Inc.
Item 1A. |
Risk Factors |
In addition to other information contained in this Annual Report, including certain cautionary and forward-looking statements, you should carefully consider the following factors in evaluating an investment in SunLink:
Consolidated Operations Risks
We may not be able to obtain a replacement for our existing Credit Facility. SunLinks primary credit agreement termination date is January 1, 2013. Under the agreement, the Companys Term Loan and Revolving Loan of the Credit Facility has a balance of $649 and $4,931 as of September 10, 2012, respectively.
We are seeking to refinance the remaining unpaid balance of the Credit Facility with a new lender. Although, we believe the Company will be able to refinance existing borrowings under one or more replacement loan facilities either on a company-wide or individual facility basis, there can be no assurance that we will be able to obtain new financing in the amount needed on improved or comparable terms or at all. Although we believe that the Company should be able to continue in compliance with the financial covenants in our Credit Facility, through the termination date, we cannot assure you that we will be able to do so. Our ability to make the required debt service and interest payments under the Credit Facility depends on, among other things, our ability to generate sufficient cash flows from operating activities. If we are unable to generate sufficient cash flow from operations to meet our debt service commitments or are unable to refinance or restructure our indebtedness prior to maturity at January 1, 2013, such failure could have material adverse effects on the Company.
If our operating results continue to decline, we may not be able to generate sufficient cash flows to meet our liquidity needs.
We rely upon cash on hand, cash from operations and a revolving loan facility to fund our cash requirements for working capital, capital expenditures, commitments and payments of principal and interest on borrowings. Our ability to generate cash from operations has been negatively impacted by uncollectible self-pay net revenues of our Healthcare Facilities Segment, increased salary expenses for employed physicians and decreased patient volume at our facilities as a result of economic conditions in the locations we serve as well as decreased sales volume and earning experienced by our Specialty Pharmacy Segment. We expect that these factors will continue to have a negative impact on our business for the foreseeable future. Further deterioration would negatively impact our results of operations and cash flows.
We may not be able to maintain compliance with or borrow under out existing Credit Facility.
We currently have borrowing capacity under the revolving portion of the Credit Facility but there can be no assurance that we will be in compliance with the financial covenants. If non-compliance occurs, we may have no ability to borrow funds under the revolving portion of the Credit Facility. If we are unable to borrow under our existing Credit Facility or obtain alternative financing such failure could have a material adverse effect on the Company.
SunLink may require additional debt or equity capital in order to make significant capital investments or expand our operations and the inability to make significant capital investments or expand our operations may negatively affect SunLinks competitive position, reduce earnings, and negatively affect our results of operations.
SunLinks operational and growth plans require significant capital investments. Significant capital investments are required for on-going and planned capital improvements at existing hospitals and may be required in connection with future capital projects either in connection with existing properties or future acquired properties. SunLinks ability to make capital investments depends on numerous factors such as the availability of
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funds from operations and its credit facility and access to additional debt and equity financing. No assurance can be given that the necessary funds will be available. Moreover, incurrence of additional debt financing, if available, may involve additional restrictive covenants that could negatively affect SunLinks ability to operate its business in the desired manner, and raising additional equity may be dilutive to shareholders. The failure to obtain funds necessary for the realization of SunLinks plans could prevent SunLink from realizing its strategies and, in particular, could force SunLink to forego opportunities that may arise in the future. This could, in turn, have a negative impact on SunLinks competitive position.
SunLinks revenues are heavily concentrated in the State of Georgia which makes SunLink particularly sensitive to economic and other changes in Georgia.
For the fiscal year ended June 30, 2012, our two Georgia hospitals generated approximately 42% of consolidated gross revenues for the year. Accordingly, any adverse change in the current demographic, economic, competitive or regulatory conditions in the State of Georgia could have a material adverse effect on the business, financial condition, results of operations or prospects of SunLink.
SunLink depends heavily on its management personnel and the loss of the services of one or more of SunLinks key senior management personnel could weaken SunLinks management team.
SunLink has been, and will continue to be, dependent upon the services and management experience of its executive officers. If any of SunLinks executive officers were to resign their positions or otherwise be unable to serve, SunLinks management could be weakened and operating results could be adversely affected; however, to our knowledge, no key executive personnel intend to retire or terminate their employment with SunLink in the near future.
SunLink conducts business in a heavily regulated industry; changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce revenue and profitability.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
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licensure; |
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conduct of operations including patient referrals, physician recruiting practices, cost reporting and billing practices; |
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ownership of facilities; |
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addition of facilities and services; |
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confidentiality, maintenance, and security issues associated with medical records; |
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billing for services; and |
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prices for services. |
These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations, including in particular, Medicare and Medicaid anti-fraud and abuse amendments, codified in Section 1128B(b) of the Social Security Act and known as the anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders for services or items reimbursable under Medicare, Medicaid, and other federal healthcare programs.
HHS regulations describe some of the conduct and business relationships immune from prosecution under the anti-kickback statute. The fact that a given business arrangement does not fall within one of these safe harbor provisions does not render the arrangement illegal. However, business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.
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We have a variety of financial relationships with physicians who refer patients to our hospitals. We have contracts with physicians providing services under a variety of financial arrangements such as employment contracts and professional service agreements. We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians into the communities served by our hospitals.
HIPAA broadened the scope of the fraud and abuse laws to include all healthcare services, whether or not they are reimbursed under a federal program. In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services in which the physicians or their immediate family members have an ownership interest or certain other financial arrangements.
In addition, SunLinks facilities will continue to remain subject to any state laws that are more restrictive than the regulations issued under HIPAA, which vary by state and could impose additional penalties. In recent years, both federal and state government agencies have announced plans for or implemented heightened and coordinated civil and criminal enforcement efforts.
Government officials charged with responsibility for enforcing healthcare laws could assert that SunLink or any of the transactions in which the Company or its subsidiaries or their predecessors is or was involved, are in violation of these laws. It is also possible that these laws ultimately could be interpreted by the courts in a manner that is different from the interpretations made by the Company or others. A determination that either SunLink or its subsidiaries or their predecessors is or was involved in a transaction that violated these laws, or the public announcement that SunLink or its subsidiaries or their predecessors is being investigated for possible violations of these laws, could have a material adverse effect on SunLinks business, financial condition, results of operations or prospects and SunLinks business reputation could suffer significantly.
The laws, rules, and regulations described above are complex and subject to interpretation. In the event of a determination that we are in violation of any of these laws, rules or regulations, or if further changes in the regulatory framework occur, our results of operations could be significantly harmed.
SunLink is and in the future could be subject to claims related to discontinued operations, including discontinued healthcare operations.
Over the past 23 years, SunLink has discontinued operations carried on by its former industrial and life sciences and engineering segments, and U.K. child safety segments, leisure marine, and housewares segments as well as certain of our healthcare operations. SunLink currently does not purchase insurance policies to reduce product liability or other discontinued operations exposures and does not anticipate it will purchase such insurance in the future. Based upon an evaluation of information currently available and consultation with legal counsel, management has not reserved any amounts for contingencies related to the discontinued operations.
The industry trend towards value-based purchasing may negatively impact our revenues.
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require hospitals to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payors currently require hospitals to report quality data, and several commercial payors do not reimburse hospitals for certain preventable adverse events.
The Affordable Care Act contains a number of provisions intended to promote value-based purchasing. Effective July 1, 2011, the Affordable Care Act prohibits the use of federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (HACs). An HAC is a
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condition that is acquired by a patient while admitted as an inpatient at a hospital, such as a surgical site infection. Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare payments. Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.
The Affordable Care Act also requires HHS to implement a value-based purchasing program for inpatient hospital services. The Affordable Care Act requires HHS to reduce inpatient hospital payments for all discharges by a percentage beginning at 1% in federal fiscal year 2013 and increasing by 0.25% each fiscal year up to 2% in federal fiscal year 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions.
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our results of operations, but it could negatively impact our financial condition or results of operations.
The lingering effects of the economic recession could materially adversely affect our cash flows, financial position, or results of operations.
The United States economy recently experienced a major economic recession, the economy remains weak, unemployment levels remain high, and there is a substantial risk that the economy will lapse back into recession. While certain healthcare spending is considered non-discretionary and may not be significantly impacted by economic downturns, other types of healthcare spending may be adversely impacted by such conditions. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose:
|
to defer or forego elective surgeries and other non-emergent procedures, which are generally more profitable lines of business for hospitals; or |
|
a high-deductible insurance plan or no insurance at all, which increases a hospitals dependence on self-pay revenue. Moreover, a greater number of uninsured patients may seek care in our emergency rooms. |
We believe the economic recession has had an adverse effect on our business. Furthermore, although we are unable to quantify the specific impact of continued adverse economic conditions on our business, we believe that the lingering effects of the economic recession have had an adverse impact on our operations. Such impacts can be expected to continue to impact not only the healthcare decisions of our patients and potential patients and could also have an adverse impact on the solvency of certain managed care providers and other counterparties to transactions with us.
SunLink is subject to potential claims for professional liability, including claims based on the acts or omissions of third parties, which claims may not be covered by insurance.
SunLink is subject to potential claims for professional liability (medical malpractice) in connection with our current operations, as well as potentially acquired or discontinued operations. To cover such claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe are sufficient for our operations, although some claims may exceed the scope or amount of the coverage in effect. The assertion of a significant number of claims, either within our self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile and we cannot assure you that professional liability insurance will continue to be available on terms acceptable to us, if at all. The
34
operations of our hospitals also depend on the professional services of physicians and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services, would not be brought against one of our hospitals or SunLink, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third-party whose acts or omissions occasioned the legal action.
Risks Related to Our Healthcare Facility Operations
SunLinks success depends on its ability to maintain good relationships with the physicians at its hospitals and, if SunLink is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues at SunLink hospitals may decrease and SunLinks operating performance could decline.
Because physicians generally direct the majority of hospital admissions and outpatient services, SunLinks success is, in part, dependent upon the number and quality of physicians on the medical staffs of its hospitals, the admissions and referrals practices of the physicians at our hospitals, and our ability to maintain good relations with our physicians. Many physicians at SunLink hospitals are not employees of the hospitals at which they practice and, in many of the markets that SunLink serves, most physicians have admitting privileges at other hospitals in addition to SunLinks hospitals. If SunLink is unable to successfully maintain good relationships with physicians, admissions at SunLink hospitals may decrease and SunLinks operating performance could decline.
SunLink depends heavily on its healthcare facility management personnel and the loss of the services of one or more of SunLinks key local management personnel could weaken SunLinks management team and its ability to deliver healthcare services.
SunLinks success depends on its ability to attract and retain managers at its hospitals and related health care facilities, on the ability of hospital-based officers and key employees to manage growth successfully, and on their ability to attract and retain skilled employees. SunLink has not had any material difficulties in attracting healthcare facility management; however, if SunLink is unable to attract and retain affective local management, the operating performance of our facilities could decline.
SunLinks success depends on its ability to attract and retain qualified healthcare professionals and a shortage of qualified healthcare professionals in certain markets could weaken our ability to deliver healthcare services.
In addition to the physicians and management personnel whom SunLink employs, SunLinks operations are dependent on the efforts, ability, and experience of other healthcare professionals, such as nurses, pharmacists and lab technicians. Nurses, pharmacists, lab technicians and other healthcare professionals are generally employees of each individual SunLink hospital. SunLinks success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals in certain markets, the loss of some or all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause SunLinks operating performance to decline.
A significant portion of SunLinks revenue is dependent on Medicare and Medicaid payments, and possible reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.
A significant portion of SunLinks revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. SunLink derived approximately 80.3% of its patient days and 53.4% of its net patient revenues from the Medicare and Medicaid programs for the year ended June 30, 2012. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial portion of hospital procedures and costs.
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Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on SunLinks business, financial condition, results of operations or prospects.
Revenue and profitability of our healthcare facility operations, especially our community hospital operations, may be constrained by future cost containment initiatives undertaken by purchasers of healthcare services if SunLink is unable to contain costs.
Our hospitals have been affected by the increasing number of initiatives undertaken during the past several years by all major purchasers of healthcare, including (in addition to federal and state governments) insurance companies and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs. Our community hospital operations derived approximately 47% of their net patient revenues for the fiscal year ended June 30, 2012 from private payors and other non-governmental sources who contributed approximately 20% of SunLinks patient days. Initiatives such as managed care organizations offering prepaid and discounted medical services packages have adversely affected hospital revenue growth throughout the country and such packages represent an increasing portion of SunLinks admissions and outpatient revenues and have resulted in reduced revenue growth at our hospitals. In addition, private payers increasingly are attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations, referred to as PPOs. If we are unable to contain costs, especially in our hospital operations, through increased operational efficiencies and the trend toward declining reimbursements and payments continues, the results of healthcare facility segment operations and cash flow will be adversely affected and the results of our consolidated operations and our consolidated cash flow similarly likely would be adversely affected.
Our healthcare facilities, especially our community hospitals, face intense competition from other hospitals and healthcare providers which directly affect our segment and consolidated revenues and profitability.
Although each of our hospitals operates in communities where they are currently the only general, acute care hospital, they do face competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in these markets may migrate to these competing facilities as a result of local physician referrals, managed care plan incentives or personal choice.
The healthcare business is highly competitive and competition among hospitals and other healthcare providers for patients has intensified in recent years. Each of our hospitals operates in geographic areas where they compete with at least one other hospital that provides services comparable to those offered by our hospitals. Some of these competing facilities offer services, including extensive medical research and medical education programs, which are not offered by SunLinks facilities. Some of the competing hospitals are owned or operated by tax-supported governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property, and income taxes. In some of these markets, SunLinks hospitals also face competition from other for-profit hospital companies, some of which have substantially greater resources, as well as other providers such as outpatient surgery and diagnostic centers.
The intense competition from other hospitals and other healthcare providers directly affects the market share of our community hospitals, as well as their and our revenues and profitability.
Changes in market demographics may increase competition for certain of our community hospitals.
Some of our hospitals are located in exurban areas which are becoming more suburban or metropolitan. Such markets are likely to attract additional competitors, including satellite operations of tertiary hospitals. We cannot assure you that we will have the financial resources to fund capital improvements to our existing facilities,
36
which may face additional competition or that even if financial resources are available to us, projected operating results will justify such expenditures. An inability to fund or the infeasibility of funding capital improvements could directly or indirectly have an adverse impact on hospital revenues through lower patient utilization, increased difficulty in physician recruitment and otherwise as a result of increased competition.
SunLinks hospitals are and our other healthcare facilities may be subject to, and depend on, certificate of need laws which could affect their ability to operate profitably.
All states in which SunLink currently operates hospitals and nursing homes have laws requiring approval for the purchase, construction or expansion of various healthcare facilities including hospitals, nursing homes and ambulatory surgery centers and the provision of various services. Under such certificate of need laws, prior state approval is required for the acquisition of major medical equipment or the purchase, lease, construction, expansion, sale or closure of covered healthcare facilities, based on a determination of need for additional or expanded facilities or services. The required approval is known generally as a certificate of need (CON). A CON may be required for capital expenditures exceeding a prescribed amount, changes in hospital and nursing home bed capacity or services, and certain other matters. The failure to obtain any required CON may impair SunLinks ability to operate profitably.
In addition, the elimination or modification of CON laws in states in which SunLink operates or in the future may own hospitals and other covered healthcare facilities could subject our hospitals to greater competition making it more difficult to operate profitably.
If we fail to effectively and timely implement electronic health record systems and transition to the ICD-10 coding system, our operations could be adversely affected.
As required by ARRA, HHS has adopted an incentive payment program for eligible hospitals and healthcare professionals that implement certified EHR technology and use it consistently with meaningful use requirements. If our hospitals and employed or contracted professionals do not meet the Medicare or Medicaid EHR incentive program requirements, we will not receive Medicare or Medicaid incentive payments to offset some of the costs of implementing the EHR systems. Further, beginning in federal fiscal year 2015, eligible hospitals and physicians that fail to demonstrate meaningful use of certified EHR technology will be subject to reduced payments from Medicare. Failure to implement EHR systems effectively and in a timely manner could have a material, adverse effect on our financial position and results of operations.
Health plans and providers, including our hospitals, are required to transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for inpatient claims. Under current regulations, use of the ICD-10 system is required beginning October 1, 2014. Transition to the new ICD-10 system requires significant investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transition to ICD-10, it is possible that our hospitals could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners.
Risk Relating to our Specialty Pharmacy Business
The operations of our Specialty Pharmacy Segment may be adversely affected by changes in government reimbursement regulations and payment levels.
For the year ended June 30, 2012, the operations of our Specialty Pharmacy Segment derived approximately 57% of its net revenues from government payors, principally Medicare and Medicaid. The Deficit Reduction Act of 2005 exempted rural providers of home care related services from the competitive acquisition program to which urban providers are subject.
37
We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by the operations of our Specialty Pharmacy Segment or that we will continue to be able to operate our Specialty Pharmacy Segment profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which we operate, or may seek to operate, in particular or that we would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.
The operations of our Specialty Pharmacy Segment could be harmed by further changes in government purchasing methodologies and reimbursement rates for Medicare or Medicaid.
In addition to the impact of MMA implemented or inspired changes, in order to deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, and to raise Medicaid co-pays and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. Any reductions in amounts reimbursable by other government programs for our services or changes in regulations governing such reimbursements could materially and adversely affect our business, financial condition and results of operations.
Our durable medical equipment service line may be adversely affected by changes in government reimbursement regulations and payment levels, especially if our durable medical equipment service line becomes subject to competitive bidding procedures.
Although we are currently exempted under the Deficit Reduction Act of 2005 from the competitive acquisition program for DMEPOS, we cannot be sure such exemption will continue to be available in the future. Loss of such exemption could have an adverse effect on our results of operations.
The operations of our Specialty Pharmacy Segment depend on a continuous supply of key products. Any shortages of key products could adversely affect our business .
Many of the biopharmaceutical products distributed by the operations of our Specialty Pharmacy Segment are manufactured with ingredients that are susceptible to supply shortages. In addition, the manufacturers of these products may not have adequate manufacturing capability to meet rising demand. If any products we distribute are in short supply for long periods of time, this could result in a material adverse effect on our business and results of operations.
The operations of our Specialty Pharmacy Segment are highly dependent on relationships with key suppliers and the loss of any of such key suppliers could adversely affect our business.
Any termination of, or adverse change in, our relationships with our key suppliers, or the loss of supply of one of our key products for any other reason, could have a material adverse effect on our business and results of operations. The largest supplier for our specialty pharmacy operations accounted for approximately 57% of Carmichaels total net sales in the fiscal year ended June 30, 2012. Our specialty pharmacy operations have a single source of supply for many of our key products, including one product which accounted for approximately 22% of Carmichaels total net sales in the fiscal year ended June 30, 2012. In addition, we have few long-term contracts with our suppliers. Our arrangements with most of our suppliers may be canceled by either party, without cause, on minimal notice. Many of these arrangements are not governed by written agreements.
The loss of one or more of our larger institutional pharmacy customers could hurt our business by reducing the revenues and profitability of the operations of our Specialty Pharmacy Segment.
As is customary in the institutional pharmacy industry, our Specialty Pharmacy Segment generally does not have long-term contracts with our institutional pharmacy customers. Significant declines in the level of purchases by one or more of our larger institutional pharmacy customers could have a material adverse effect on our business and results of operations.
38
Our failure to maintain eligibility as a Medicare and Medicaid supplier could materially adversely affect our competitive position. Likewise, our failure to maintain and expand relationships with private payors, who can effectively determine the pharmacy source for their members, could materially adversely affect our competitive position .
Changes in average wholesale prices could reduce our pricing and margins.
Many government payors, including Medicare and Medicaid, have paid, or continue to pay, the operations of our Specialty Pharmacy Segment directly or indirectly at a rate based upon a drugs AWP less a percentage factor. We also have contracted with some private payors to sell drugs at AWP or at AWP less a percentage factor. For most drugs, AWP is compiled and published by several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations, reports or payments; however, there can be no assurance that the ability of our Specialty Pharmacy Segment to negotiate discounts from drug manufacturers will not be materially adversely affected by such investigations or lawsuits.
The federal government also has entered into settlement agreements with several drug manufacturers relating to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the average sales price, to government healthcare programs. The average sales price is calculated differently than AWP.
We face numerous competitors and potential competitors in the market in which our Specialty Pharmacy Segment operates, many of whom are significantly larger and who have significantly greater financial resources.
Although we believe market penetration by large national companies into our existing market in which our Specialty Pharmacy Segment operates has not been substantial, we cannot assure you that one or more of such companies or other healthcare companies will not seek to compete or intensify their level of competition in the areas in which we conduct or may seek to conduct one or more of the components of the operations of our Specialty Pharmacy Segment.
The operations of our Specialty Pharmacy Segment may be adversely affected by industry trends in managed care contracting and consolidation.
A growing number of health plans are contracting with a single provider of specialty pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of specialty pharmacy services. If we are unable to obtain managed care contracts in the areas in which we provide specialty pharmacy services or are unable to obtain specialty pharmacy products at reasonable costs or at all, the business operations of our Specialty Pharmacy Segment could be adversely affected.
The specialty pharmacy market may grow slower than expected, which could adversely affect our revenues.
We cannot predict the rate of actual future growth in product availability and spending, the extent to which patient demand or spending for specialty drug services in rural or exurban areas will match national averages or whether government payors will provide reimbursement for new products under Medicare or Medicare on a timely basis, at what rates or at all, or. Adverse developments in any of these areas could have an adverse impact on the business operations of our Specialty Pharmacy Segment.
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Other Risks
SunLink may issue additional equity in the future which could dilute the value of shares of existing shareholders.
The primary sources of SunLinks working capital are cash generated from operations and borrowings available under the revolving loan facility in our current credit facility (a $9,000 revolving loan with $5,931 of the revolver outstanding and approximately $950 available to borrow at June 30, 2012 and with $4,931 of the revolver outstanding and approximately $1,060 available to borrow at September 10, 2012). We believe our ability to incur additional indebtedness is limited and we expect that the vast majority of the proceeds of any new borrowings would replace indebtedness under our current credit facility.
Our ability to raise additional equity capital may also be limited. In 2011, the Companys Board of Directors authorized the private placement before August 31, 2011 of a total of up to 3,800,000 of the Companys common shares at a price equal to the average closing price for the prior ten trading days (on which the Companys shares traded) with a minimum placement of $2,500. On July 28, 2011, SunLink announced the sale of approximately 1,329,000 common shares at $1.90 per share with certain of its officers and directors and/or their affiliates. The net proceeds of the private placement of approximately $2,500 were used, together with the Companys operating funds, to make an $8,000 pre-payment on the Credit Facility Term Loan. A special committee of the Companys Board of Directors comprised of disinterested directors evaluated the private placement transaction and obtained an opinion of an outside advisor selected by the special committee that the price and terms of the private placement were fair from a financial point of view to the Company. No additional shares were sold pursuant to the private placement. Although the Board of Directors has not decided to effect any additional equity transactions at this time, it may authorize the Company to do so in the future in connection with mergers and acquisitions, capital transactions or for other purposes. Any additional equity transactions could result in dilution in the value of existing shares.
Forward-looking statements in this annual report may prove inaccurate.
This document contains forward-looking statements about SunLink that are not historical facts but, rather, are statements about future expectations. Forward-looking statements in this document are based on managements current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond the control of SunLink, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include those described above under Risk Factors and elsewhere in this report under Forward-Looking Statements .
Item 1B. |
Unresolved Staff Comments |
None.
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Item 2. |
Properties |
Our principal properties as of the date of filing of this report are listed below:
Name or Function |
Location
|
Licensed
Beds |
Date of
Acquisition/Lease
|
Ownership
Type |
||||||
Healthcare Facilities |
||||||||||
Chestatee Regional Hospital |
Dahlonega, GA | 49 | February 1, 2001 | Owned | ||||||
North Georgia Medical Center & Gilmer Nursing Home |
Ellijay, GA | 50 | February 1, 2001 | Owned | ||||||
Trace Regional Hospital & Floy Dyer Manor Nursing Home |
Houston, MS | 84 | February 1, 2001 | Owned | ||||||
Callaway Community Hospital |
Fulton, MO | 49 | October 3, 2003 | Owned | ||||||
Missouri Southern Healthcare(1) |
Dexter, MO | 50 | February 1, 2001 | Leased | ||||||
Specialty Pharmacy Operations |
||||||||||
Carmichael Cashway Pharmacy(2) |
Crowley, LA | N/A | April 22, 2008 | Leased | ||||||
Carmichael Cashway Pharmacy(3) |
Lafayette, LA | N/A | April 22, 2008 | Leased | ||||||
Carmichael Cashway Pharmacy(4) |
Lake Charles, LA | N/A | April 22, 2008 | Leased | ||||||
Other |
||||||||||
Chilton Medical Center(5) |
Clanton, AL | N/A | February 1, 2001 | Owned | ||||||
Corporate Offices(6) |
Atlanta, GA | N/A | June 1, 1998 | Leased |
(1) |
The lease expires in March, 2019. |
(2) |
Lease of approximately 25,000 square feet of store location, warehouse and office space. The lease expires in April 2013 and provides for a renewal of the lease for two five year terms. |
(3) |
Lease of approximately 5,900 square feet of store location and warehouse space. The lease expires in October 2012. |
(4) |
Lease of approximately 4,000 square feet of store location and warehouse space. The lease expires in December 2012. |
(5) |
Operations were sold February 28, 2011. The buyer owns the hospital license and leases the facility from SunLink with an option to purchase. |
(6) |
Lease of approximately 4,800 square feet of office space for corporate staff. The lease was scheduled to expire in September 2009 but has been renewed through March 2015. |
Item 3. |
Legal Proceedings |
On December 7, 2007, Southern Health Corporation of Ellijay, Inc. (SHC-Ellijay) filed a Complaint against James P. Garrett and Roberta Mundy, both individually and as Fiduciary of the Estate of Randy Mundy (collectively, Defendants), seeking specific performance of an Option Agreement (the Option Agreement) dated April 17, 2007, between SHC-Ellijay, Mr. Garrett, and Ms. Mundy as Executrix of the Estate of Randy Mundy for the sale of approximately 24.74 acres of real property located in Gilmer County, Georgia, and recovery of SHC-Ellijays damages suffered as a result of Defendants failure to close the transaction in accordance with the Option Agreement. SHC-Ellijay also stated alternative claims for breach of the Option Agreement and fraud, along with claims to recover attorneys fees and punitive damages.
In January 2008, Defendants filed motions to strike, motions to dismiss, answers, affirmative defenses, and a counterclaim against SHC-Ellijay. On March 3, 2009, SHC-Ellijay filed a First Amended and Restated Complaint for Damages, which effectively dropped the cause of action for specific performance of the Option Agreement. On May 7, 2009, Mr. Garrett and Ms. Mundy served a motion for summary judgment on all counts and causes of action stated in the First Amended Complaint. The court has postponed consideration of the defendants motion for summary judgment and SHC-Ellijays response thereto until after a discovery dispute between the parties was resolved. After further motions and argument, the parties eventually completed discovery.
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On May 12, 2011, SHC-Ellijay filed a motion for partial summary judgment as to Defendants liability for breaches of contract and for summary judgment denying Defendants counterclaims. On June 10, 2011, Defendants filed a response in opposition to SHC-Ellijays motion and a cross motion for summary judgment. On July 27, 2011, SHC-Ellijay filed a reply brief in further support of its motion for partial summary judgment on the complaint and full summary judgment on the Defendants counterclaims and brief in opposition to Defendants cross motion for summary judgment.
On April 11, 2012, the Court entered an Order granting SHC-Ellijays motion for partial summary judgment and denying Defendants motions for summary judgment. On or about April 23, 2012, Defendants filed a notice of appeal to the Georgia Court of Appeals. Defendants filed their Brief of Appellants on July 30, 2012. SHC-Ellijay filed its Brief of Appellee on August 21, 2012. The case remains pending before the Georgia Court of Appeals.
SunLink denies that it has any liability to Defendants and intends to vigorously defend the claims asserted against SunLink by the Defendants complaint and to vigorously pursue its claims against the Defendants. While the ultimate outcome and materiality of the litigation cannot be determined, in managements opinion the litigation will not have a material adverse effect on SunLinks financial condition or results of operations.
SunLink is a party to claims and litigation incidental to its business, for which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.
Item 4. |
Reserved |
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PART II
Item 5. |
Market for Registrants Common Equity and Related Stockholder Matters |
SunLink common shares are listed on the NYSE Amex Equities exchange. SunLinks ticker symbol is SSY. The following table shows, for the calendar quarters indicated, based on published financial sources, the high and low sale prices of SunLink common shares as reported on the NYSE Amex Equities exchange.
Sales Price of
SunLink Common Shares |
||||||||
High | Low | |||||||
Fiscal 2012 (July 1, 2011 - June 30, 2012) |
||||||||
Fourth Quarter |
$ | 1.29 | $ | 0.86 | ||||
Third Quarter |
1.67 | 0.97 | ||||||
Second Quarter |
2.00 | 1.64 | ||||||
First Quarter |
2.20 | 1.83 | ||||||
Fiscal 2011 (July 1, 2010 - June 30, 2011) |
||||||||
Fourth Quarter |
$ | 2.65 | $ | 1.50 | ||||
Third Quarter |
2.00 | 1.48 | ||||||
Second Quarter |
2.40 | 1.40 | ||||||
First Quarter |
2.40 | 1.75 |
American Stock Transfer & Trust Company is the Transfer Agent and Registrar for our common shares. For all shareholder inquiries, call American Stock Transfer & Trusts Shareholder Services Department at 1-888-937-5449.
Dividends
SunLink does not currently pay cash dividends. SunLink intends to retain its earnings for use in the operation and expansion of its business and, therefore, does not anticipate declaring or paying regular cash dividends in the foreseeable future. Any future determination to declare or pay cash dividends will be determined by SunLinks board of directors and will depend on SunLinks financial condition, results of operations, business, prospects, capital requirements, credit agreements and such other matters as the board of directors may consider relevant. SunLink is currently precluded from paying any cash dividends under its current Credit Facility.
Holders
As of June 30, 2012 there were approximately 508 registered holders of SunLink common shares.
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Securities Authorized for Issuance under Equity Compensation Plans
The following provides tabular disclosure of the number of securities at June 30, 2012 to be issued upon the exercise of outstanding options, the weighted average exercise price of outstanding options and the number of securities remaining available for future issuance under equity compensation plans, reported by two categories- plans that have been approved by shareholders and plans that have not been so approved:
(a) | (b) | (c) | ||||||||||
Plan Category |
Number of securities
to be issued upon exercise of outstanding options |
Weighted
average exercise price of outstanding options |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||||||
Equity compensation plans approved by security holders: |
||||||||||||
2001 Outside Directors Stock Ownership and |
||||||||||||
Stock Option Plan |
37,500 | $ | 2.42 | 0 | ||||||||
2001 Long-Term Stock Option Plan |
3,000 | 8.69 | 0 | |||||||||
2005 Equity Incentive Plan |
289,999 | 4.16 | 440,676 | |||||||||
2011 Director Stock Option Plan |
70,000 | 1.67 | 230,000 | |||||||||
|
|
|
|
|
|
|||||||
400,499 | $ | 4.75 | 670,676 | |||||||||
|
|
|
|
|
|
|||||||
Equity compensation plans not approved by security holders: |
||||||||||||
None |
0 | 0 | 0 | |||||||||
|
|
|
|
|
|
|||||||
Total |
400,499 | $ | 4.75 | 670,676 | ||||||||
|
|
|
|
|
|
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Performance Graph
The following graph presents a comparison of five years cumulative total return for SunLink, the NYSE Amex Equities exchange Composite Index and a self constructed peer group. The peer group consists of Amsurg Corp., Community Health Systems Inc., Dynacq Healthcare Inc., Health Management Association Inc., Lifepoint Hospitals Inc., Magellan Health Services Inc., Medcath Corp., Paincare Tenet Healthcare Corp., and Universal Health Services Inc. There is no assurance the Hospital Index peer group or NYSE Amex Equities Composite is comparable to SunLink, because, among other reasons, both consist of larger companies than SunLink.
*$100 invested on 6/30/07 in stock or index, including reinvestment of dividends.
Fiscal year ending June 30.
6/07 | 6/08 | 6/09 | 6/10 | 6/11 | 6/12 | |||||||||||||||||||
SunLink Health Systems, Inc. |
100.00 | 76.11 | 34.34 | 35.69 | 30.06 | 18.99 | ||||||||||||||||||
NYSE Amex Composite |
100.00 | 101.05 | 77.20 | 91.05 | 126.03 | 131.42 | ||||||||||||||||||
Hospitals Index |
100.00 | 81.23 | 61.03 | 82.15 | 102.35 | 91.83 |
Item 6. |
Selected Financial Data |
Selected historical financial data presented below as of and for the fiscal years ended June 30, 2012, 2011, 2010, 2009 and 2008 have been derived from the audited consolidated financial statements of SunLink. The following financial information reflects the acquisition of our two HealthMont hospitals and Carmichael and the disposition of Mountainside Medical Center, Chilton Medical Center, Memorial Hospital of Adel and three home health agencies. This data should be read in conjunction with Item 7. Managements Discussion and Analysis of
45
Financial Condition and Results of Operations, and the Consolidated Financial Statements of SunLink and the notes thereto included in Item 8 of this Annual Report.
SunLink Selected Historical Financial Data
(All amounts in thousands, except per share amounts)
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Net Revenues |
$ | 146,674 | $ | 154,380 | $ | 166,322 | $ | 162,961 | $ | 123,946 | ||||||||||
Earnings (loss) from continuing operations |
652 | (15,416 | ) | (422 | ) | 611 | 1,435 | |||||||||||||
Net earnings (loss) |
1,081 | (16,103 | ) | 102 | 912 | 1,616 | ||||||||||||||
Earnings (loss) per share from continuing operations |
||||||||||||||||||||
Basic |
0.07 | (1.90 | ) | (0.05 | ) | 0.08 | 0.19 | |||||||||||||
Diluted |
0.07 | (1.90 | ) | (0.05 | ) | 0.08 | 0.18 | |||||||||||||
Net earnings (loss) per share: |
||||||||||||||||||||
Basic |
0.12 | (1.99 | ) | 0.01 | 0.11 | 0.21 | ||||||||||||||
Diluted |
0.12 | (1.99 | ) | 0.01 | 0.11 | 0.21 | ||||||||||||||
Total Assets |
79,172 | 91,830 | 98,490 | 107,383 | 111,624 | |||||||||||||||
Long-term debt, including current maturities |
23,090 | 31,752 | 33,437 | 35,545 | 37,963 | |||||||||||||||
Shareholders equity |
$ | 29,291 | $ | 26,068 | $ | 42,692 | $ | 42,392 | $ | 40,244 |
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations (all dollar amounts in thousands, except per share and revenue per equivalent admissions amounts) |
This Annual Report and the documents that are incorporated by reference in this Annual Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as may, believe, will, seeks to, expect, project, estimate, anticipate, plan or continue. These forward-looking statements are based on the current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. For a listing and a discussion of such factors, which could cause actual results, performance and achievements to differ materially from those anticipated, see Certain Cautionary StatementsForward Looking Information and Item 1A.
Critical Accounting Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:
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it requires assumptions to be made that were uncertain at the time the estimate was made; and |
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changes in the estimate or different estimates that could have been made could have a material impact on our consolidated statement of earnings or financial condition. |
The table of critical accounting estimates that follows is not intended to be a comprehensive list of all of our accounting policies that require estimates. We believe that of our significant accounting policies, as discussed in Note 2 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the fiscal year ended June 30, 2012, the estimates discussed below involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and financial condition.
46
The table that follows presents information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate:
Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item
(dollar amounts in thousands, except per
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Assumption / Approach Used (dollar amounts in thousands, except per share) |
Sensitivity Analysis
(dollar amounts in thousands, except
|
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Receivables-net and Provision for Bad Debts | ||||
Receivables-net for our Healthcare Facilities Segment primarily consists of amounts due from third-party payors and patients from providing healthcare services to hospital facility patients. Receivables-net for our Specialty Pharmacy Segment primarily consists of amounts due from third-party payors; institutions such as nursing homes, home health, hospice, hospitals; pharmacy stores; Medicaid Part D program; and customers from the sale of pharmacy services and merchandise. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. The primary uncertainty lies with accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. Our allowance for doubtful accounts, included in our balance sheets as of June 30 was as follows:
2012$9,121; and 2011$12,317.
Our provision for bad debts, included in our results of operations, was as follows :
2012$14,024; 2011$16,841; and 2010$20,364 |
The largest component of bad debts in our patient accounts receivable for our healthcare facilities and Specialty Pharmacy Segments relates to accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. In general, we attempt to collect deductibles, co-payments and self-pay accounts prior to the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes.
We attempt to verify each patients insurance coverage as early as possible before a scheduled non-emergency admission or procedure, including with respect to eligibility, benefits and authorization/pre-certification requirements, in order to notify patients of the estimated amounts for which they will be responsible. We attempt to verify insurance coverage within a reasonable amount of time for all emergency room visits and non-emergency urgent admissions in compliance with the Emergency Medical Treatment and Active Labor Act. |
A significant increase in our provision for doubtful accounts (as a percentage of revenues) would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and potentially our future access to capital.
If net revenues during fiscal year 2012 were changed by 1%, our 2012 after-tax income from continuing operations would change by approximately $968 or diluted earnings per share of $0.10.
This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate uncollectible patient accounts that are highly uncertain and requires a high degree of judgment. It is impacted by, among other things, changes in regional economic conditions, business office operations, payor mix and trends in private and federal or state governmental healthcare coverage. |
47
Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item
(dollar amounts in thousands, except per
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Assumption / Approach Used (dollar amounts in thousands, except per share) |
Sensitivity Analysis
(dollar amounts in thousands, except per share) |
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Receivables-net and Provision for Bad Debts (continued) | ||||
In general, we utilize the following steps in collecting accounts receivable: if possible, cash collection of all or a portion of deductibles, co-payments and self-pay accounts prior to or at the time service is provided; billing and follow-up with third party payors; collection calls; utilization of collection agencies; sue to collect if the patient has the means to pay and chooses not to pay; and if collection efforts are unsuccessful, write off the accounts. |
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Our policy is to write off accounts after all collection efforts have failed, which is typically no longer than 120 days after the date of discharge of the patient or service to the patient or customer. Patient responsibility accounts represent the majority of our write-offs. All of our hospitals retain third-party collection agencies for billing and collection of delinquent accounts. At most of our hospitals, more than one collection agency is used to promote competition and improved performance. The selection of collection agencies and the timing of the referral of an account to a collection agency vary among hospitals. Generally, we do not write off accounts prior to utilizing the services of a collection agency. Once collection efforts have proven unsuccessful, an account is written off from our patient accounting system against the allowance for doubtful accounts. |
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We determine the adequacy of the allowance for doubtful accounts utilizing a number of analytical tools and benchmarks. No single statistic or measurement alone determines the adequacy of the allowance. |
48
Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item
(dollar amounts in thousands, except per
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Assumption / Approach Used (dollar amounts in thousands, except per share) |
Sensitivity Analysis
(dollar amounts in thousands, except per share) |
||
Receivables-net and Provision for Bad Debts (continued) | ||||
We monitor our revenue trends by payor classification on a quarter-by-quarter basis along with the composition of our accounts receivable agings. This review is focused primarily on trends in self-pay revenues, accounts receivable, co-payment receivables and historic payment patterns. |
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In addition, we analyze other factors such as days revenue in accounts receivable and we review admissions and charges by physicians, primarily focusing on recently recruited physicians. |
Days Outstanding 1 | ||||||||||||||||||||||||||||||||
Payor Class |
0 - 30 | 31 - 60 | 61 - 90 | 91 - 120 | 121 - 150 | 151 - 180 | >180 | Total | ||||||||||||||||||||||||
Medicare |
$ | 2,836 | $ | 299 | $ | 85 | $ | 104 | $ | 67 | $ | 30 | $ | 216 | $ | 3,637 | ||||||||||||||||
Commercial |
1,306 | 183 | 164 | 128 | 77 | 54 | 238 | 2,150 | ||||||||||||||||||||||||
Medicaid |
2,006 | 517 | 345 | 172 | 141 | 92 | 161 | 3,434 | ||||||||||||||||||||||||
Self Pay |
117 | 109 | 80 | 79 | 67 | 27 | 75 | 554 | ||||||||||||||||||||||||
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$ | 6,265 | $ | 1,108 | $ | 674 | $ | 483 | $ | 352 | $ | 203 | $ | 690 | $ | 9,775 | |||||||||||||||||
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1 |
The above table shows, as of June 30, 2012, net hospital patient accounts receivable aged from patient date of service and are grouped by classification of verified insurance coverage. The receivables are net of contractual allowances and allowance for doubtful accounts. Contractual allowances and the allowance for doubtful accounts are calculated by payor class and are not calculated by the aging of the patient billing date; therefore, these allowances have been allocated within the aging of the various payor classes based upon gross patient receivable amounts. |
Revenue recognition / Net Patient Service Revenues | ||||
For our Healthcare Facilities Segment, we recognize revenues in the period in which services are provided.
For our Specialty Pharmacy Segment, we recognize revenues in the period in which services are provided and at the time the customer takes possession of merchandise. Patient receivables primarily consist of amounts due
|
Revenues are recorded at estimated amounts due from patients, third-party payors, institutions, pharmacies,
and others for healthcare and pharmacy services and goods provided net of contractual discounts pursuant to contract or government payment rates. Estimates for contractual allowances are calculated using
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49
Balance Sheet or Income Statement
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except
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||
Revenue recognition / Net Patient Service Revenues (continued) | ||||
from third-party payors and patients. Amounts we receive for treatment of patients covered by governmental programs, such as Medicare and Medicaid, and other third-party payors, such as HMOs, PPOs and other private insurers, are determined pursuant to contracts or established government rates and are generally less than our established billing rates. Accordingly, our gross revenues and patient receivables are reduced to net amounts receivable pursuant to such contracts or government payment rates through an allowance for contractual discounts. Approximately 84.8%, 84.1% and 82.4% of our revenues during the years ended June 30, 2012, 2011 and 2010, respectively, relate to discounted charges. The sources of these revenues were as follows (as a percentage of total revenues):
Medicare40.3%; Medicaid13.1%; and Commercial insurance31.4%. |
computerized and manual processes depending on the type of payor involved. In certain hospitals, the contractual allowances are calculated by a computerized system based on payment terms for each payor. In other hospitals, the contractual allowances are estimated manually using historical collections for each type of payor. For all hospitals, certain manual estimates are used in calculating contractual allowances based on historical collections from payors that are not significant or have not entered into a contract with us. All contractual adjustments regardless of type of payor or method of calculation are reviewed and compared to actual experience on a periodic basis.
Accounts receivable primarily consist of amounts due from third party payors, institutions, pharmacies, and patients. Amounts we receive for the treatment of patients covered by HMOs, PPOs and other private insurers are generally less than our established billing rates. We include contractual allowances as a reduction to revenues in our financial statements based on payor specific identification and payor specific factors for rate increases and denials. |
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Governmental payors | Governmental payors | |||
The majority of services performed on Medicare and Medicaid patients are reimbursed at predetermined reimbursement rates. The differences between the established billing rates (i.e., gross |
Because the laws and regulations governing the Medicare and Medicaid programs are complexand subject to change, the
estimates of contractual discounts we record could
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50
Balance Sheet or Income Statement
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except
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Revenue recognition / Net Patient Service Revenues (continued) | ||||
charges) and the predetermined reimbursement rates are recorded as contractual discounts and deducted from gross charges. Under this prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined reimbursement rates.
Discounts for retrospectively cost-based revenues, which were more prevalent in periods before 2000, are estimated based on historical and current factors and are adjusted in future periods when settlements of filed cost reports are received.
Final settlements under all programs are subject to adjustment based on administrative review and audit by third party intermediaries, which can take several years to resolve completely. |
change by material amounts. Adjustments related to final settlements for revenues retrospectively increased our revenues by the following amounts:
2011$510; 2010$709; and 2009$1,201. |
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Commercial Insurance | Commercial Insurance | |||
For most managed care plans, contractual allowances estimated at the time of service are adjusted to actual contractual allowances as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages: historical contractual allowance trends based on actual claims paid by managed care payors; review of contractual allowance information reflecting current contract terms; consideration and analysis of changes in payor mix reimbursement levels; and other issues that may impact contractual allowances. |
If our overall estimated contractual discount percentage on all of our commercial revenues during 2011 were changed by 1%, our 2012 after-tax income from continuing operations would change by approximately $225. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate the amount expected to be received and requires a high degree of judgment. It is impacted by changes in managed care contracts and other related factors.
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51
Balance Sheet or Income Statement
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except
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Revenue recognition / Net Patient Service Revenues (continued) | ||||
A significant increase in our estimate of contractual discounts would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital. |
Goodwill, other intangible assets and accounting for business combinations
Goodwill represents the excess of the purchase price over the fair value of the net assets (including separately identified intangible assets) of acquired companies. The Company has two reportable business segments with goodwill. Our goodwill by business segment included in our consolidated balance sheets as of June 30 for the following years was as follows: |
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In accordance with FASB Accounting Standards Codification 350-10, Intangibles Goodwill and Other, (ASC 350-10) goodwill and intangible assets with indefinite lives are reviewed by us at least annually for impairment. For purposes of these analyses, our estimate of fair value is based on the income approach, which estimates the fair value based on our future discounted cash flows. Our estimate of future discounted cash flows is based on assumptions and projections we believe to be currently reasonable and supportable. If we determine the carrying value of goodwill or other intangible assets to be impaired, then we reduce the carrying value. |
During the third quarter of fiscal 2012, the Company performed an interim impairment testing of the goodwill and certain intangible assets of its subsidiaries as of March 31, 2012. The Company concluded that the carrying value for its Healthmont, LLC subsidiary, part of the Healthcare Facilities Segment, exceeded its fair value, and as a result, recognized a goodwill impairment charge of $931 for such subsidiary during the year ended June 30, 2012.
As part of the fiscal 2011 goodwill and intangibles impairment analysis, the Company recognized that there has been a significant decline in net revenue during FY 2011 for the Specialty Pharmacy Segment. The analysis resulted in a $6,048 goodwill impairment charge for fiscal 2011. Additionally, the Company recognized a $3,400 impairment charge to trade name and a $3,899 impairment charge to customer relationships for fiscal 2011. |
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2012 | 2011 | |||||||||||
Healthcare Facilities |
$ | 0 | $ | 931 | ||||||||
Pharmacy |
461 | 461 | ||||||||||
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$ | 461 | $ | 1,392 | |||||||||
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The goodwill resulted from the 2004 acquisition of Healthmont, Inc. and the 2008 acquisition of Carmichael. |
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52
Balance Sheet or Income Statement
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except
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Goodwill, other intangible assets and accounting for business combinations (continued) | ||||
The Companys intangible assets relate to Certificates of Need (CON), non-competition agreements, trade name, customer relationships and Medicare licenses. CON, Non-competition agreements, customer relationships, and Medicare licenses are amortized over the terms of the agreements. The trade name has been determined to have an indefinite life and, accordingly, is not amortized. Our other intangible assets by business segment included in our consolidated balance sheets as of June 30 for the following years was as follows: |
The purchase price of acquisitions is allocated to the assets acquired and liabilities assumed based upon their respective fair values and are subject to change during the twelve month period subsequent to the acquisition date. We engage independent third-party valuation firms to assist us in determining the fair values of assets acquired and liabilities assumed at the time of acquisition. Such valuations require us to make significant estimates and assumptions, including projections of future events and operating performance. |
2012 | 2011 |
Fair value estimates are derived
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Healthcare Facilities |
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Certificates of Need |
$ | 80 | $ | 80 | ||||||||
Noncompetition agreements |
83 | 83 | ||||||||||
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163 | 163 | |||||||||||
Accumulated amortization |
(106 | ) | (91 | ) | ||||||||
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$ | 57 | $ | 72 | |||||||||
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Pharmacy |
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Trade name |
$ | 2,000 | $ | 2,000 | ||||||||
Customer relationships |
1,089 | 1,089 | ||||||||||
Medicare License |
769 | 769 | ||||||||||
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3,858 | 3,858 | |||||||||||
Accumulated amortization |
(595 | ) | (453 | ) | ||||||||
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$ | 3,263 | $ | 3,405 | |||||||||
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Total |
$ | 3,320 | $ | 3,477 | ||||||||
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Professional and general liability claims | ||||
We are subject to potential medical malpractice lawsuits and other claims as part of providing healthcare services. To mitigate a portion of this risk, we have
maintained insurance
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The reserve for professional and general liability claims is based upon independent actuarial calculations, which consider historical claims data, demographic |
Actuarial calculations include a
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53
Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item
(dollar amounts in thousands, except per
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except per share) |
||
Professional and general liability claims (continued) | ||||
for individual malpractice claims exceeding a self-insured retention amount. For the periods March 1, 2009 to February 28, 2010, March 1, 2010 to February 28, 2011, March 1, 2011 to February 28, 2012 and March 1, 2012 to February 28, 2013 our self-insured retention level is $1,000 on individual malpractice claims.
Each year, we obtain quotes from various malpractice insurers with respect to the cost of obtaining medical malpractice insurance coverage. We compare these quotes to our most recent actuarially determined estimates of losses at various self-insured retention levels. Accordingly, changes in insurance costs affect the self-insurance retention level we choose each year. As insurance costs increase, we may accept a higher level of risk in self-insured retention levels.
The reserve for professional and general liability claims included in our consolidated balance sheets as of June 30 was as follows:
2012$3,601; and 2011$4,143.
The total expense for professional and general liability coverage, included in our consolidated results of operations, was as follows:
2012$ 954; 2011$ 1,968; and 2010$1,495. |
considerations, severity factors and other actuarial assumptions in the determination of reserve estimates.
The reserve for professional and general liability claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations as of the balance sheet date. The loss estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances.
We revise our reserve estimation process by obtaining independent actuarial calculations quarterly. Our estimated reserve for professional and general liability claims will be significantly affected if
current and future claims differ from historical trends. While we monitor reported claims closely and consider potential outcomes as estimated by our independent actuaries when determining our professional and general liability reserves, the
complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process. In addition, certain states, including Georgia, have passed varying forms of tort reform which
attempt to limit the number and types of claims and the amount of some medical malpractice awards. If enacted limitations remain in place or if similar laws are passed in the states where our other hospitals are located, our loss estimates could
decrease.
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period. In determining loss
Changes in our initial estimates
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54
Balance Sheet or Income Statement
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Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity Analysis
(dollar amounts in thousands, except
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Professional and general liability claims (continued) | ||||
Conversely, liberalization of the number and type of claims and damage awards permitted under any such law applicable to our operations could cause our loss estimates to increase. |
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Accounting for income taxes | ||||
Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in our income statement. We assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance, we must include an expense as part of the income tax provision in our results of operations. Our net deferred tax asset balance (net of valuation allowance) in our consolidated balance sheets as of June 30 for the following years was as follows:
2012$11,065; and
2011$11,632.
Our valuation allowances for deferred tax assets in our consolidated balance sheets as of June 30 for the following years were as follows:
2012$2,045; and
2011$2,078.
In addition, significant judgment is required
in determining and assessing the impact of certain tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a
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The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction.
The second step is to determine the amount of the valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in the first step of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities.
In assessing tax contingencies, we identify tax
issues that we believe may be challenged upon examination by the taxing authorities. We also assess the likelihood of sustaining tax benefits associated with tax planning strategies and reduce tax benefits based on
managements
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Our deferred tax assets were $13,110 and our deferred tax liabilities were $0 at June 30, 2012, excluding the impact of valuation allowances. The Company believes that the likelihood of our not realizing the federal tax benefit of our net deferred tax assets is remote.
The IRS may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments equal to 10% of our taxable income for 2012, we would incur approximately $736 of additional tax expense for 2012 plus applicable penalties and interest. |
55
Balance Sheet or Income Statement
|
Assumption / Approach Used
(dollar amounts in thousands, except
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Sensitivity
Analysis
(dollar amounts in thousands, except per share) |
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Accounting for income taxes (continued) | ||||
loss related to tax contingencies and the loss or range of loss can be reasonably estimated.
We adjust the accruals related to tax contingencies as part of our provision for income taxes in our results of operations based upon changing facts and circumstances, such as the progress of a tax audit, development of industry related examination issues, as well as legislative, regulatory or judicial developments. A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved. |
judgment regarding such likelihood. We compute the tax on each contingency. We then determine the amount of loss, or reduction in tax benefits based upon the foregoing and reflect such amount as a component of the provision for income taxes in the reporting period.
During each reporting period, we assess the facts and circumstances related to recorded tax contingencies. If tax contingencies are no longer deemed probable based upon new facts and circumstances, the contingency is reflected as a reduction of the provision for income taxes in the current period. |
56
Financial Summary
The results of continuing operations shown in the historical summary below are for our two business segments, Healthcare Facilities and Specialty Pharmacy.
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net RevenuesHealthcare Facilities |
$ | 108,575 | $ | 114,460 | $ | 123,360 | ||||||
Net RevenuesSpecialty Pharmacy |
38,099 | 39,920 | 42,962 | |||||||||
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Total Net Revenues |
146,674 | 154,380 | 166,322 | |||||||||
Costs and expenses |
(148,969 | ) | (157,907 | ) | (165,005 | ) | ||||||
Electronic health records incentives |
9,134 | 277 | 0 | |||||||||
Impairment of goodwill and intangible assets |
(931 | ) | (13,347 | ) | 0 | |||||||
Impairment of construction in progress |
0 | 0 | (1,202 | ) | ||||||||
Gain on Sale of Home Health businesses |
0 | 0 | 2,342 | |||||||||
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Operating Profit |
5,908 | (16,597 | ) | 2,457 | ||||||||
Interest Expense |
(4,392 | ) | (7,433 | ) | (3,471 | ) | ||||||
Interest Income |
14 | 5 | 14 | |||||||||
Loss on sale of assets |
(20 | ) | 0 | 0 | ||||||||
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Earnings (loss) from continuing operations before income taxes |
$ | 1,510 | $ | (24,025 | ) | $ | (1,000 | ) | ||||
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Healthcare Facilities Segment: |
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Admissions |
4,631 | 5,226 | 5,814 | |||||||||
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Equivalent Admisssions |
16,345 | 16,118 | 17,511 | |||||||||
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Surgeries |
2,077 | 2,400 | 3,110 | |||||||||
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Revenue per Equivalent Admission |
$ | 6,617 | $ | 7,092 | $ | 7,045 | ||||||
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Equivalent admissions Equivalent admissions is used by management (and certain investors) as a general approximation of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues. The equivalent admissions computation is intended to relate outpatient revenues to the volume measure (admissions) used to measure inpatient volume to result in a general approximation of combined inpatient and outpatient volume (equivalent admissions).
Results of Operations
Our net revenues are from our two business segments, Healthcare Facilities and Specialty Pharmacy.
Healthcare Facilities Segment
Net revenues for the year ended June 30, 2012 were $108,575 with a total of 16,345 equivalent admissions and revenues per equivalent admission of $6,617 compared to net revenues of $114,460, a total of 16,118 equivalent admissions and revenues per equivalent admission of $7,092 for the year ended June 30, 2011. The 5.1% decrease in net revenues for the year ended June 30, 2012 was due primarily to decreased net revenues in all payor classes as a result of a decline in volume. Medicare net revenues decreased $3,098, a 6.6% decrease from prior year. Medicaid net revenues decreased $213, a 1.5% decrease from prior year. Commercial insurance and other decreased $841, a 2.4% decrease from prior year. Self-pay revenues decreased $1,741, a 9.6% decrease from prior year.
57
Net revenues for the fiscal year ended June 30, 2012 included revenues of $510 for the settlements and filings of prior year Medicare and Medicaid cost reports compared to net revenue of $709 for the fiscal year ended June 30, 2011. Net revenues for the fiscal year ended June 30, 2012 and 2011, included net revenues of $3,694 and $3,461 respectively, from state indigent care programs. Net outpatient service revenues decreased $2,660, a 5.0% decrease from last year to $50,051, and remained consistent with prior year as a percentage of net revenues at 46.1%.
Net revenues for the year ended June 30, 2011 were $114,460 with a total of 16,118 equivalent admissions and revenues per equivalent admission of $7,092 compared to net revenues of $123,360, a total of 17,511 equivalent admissions and revenues per equivalent admission of $7,045 for the year ended June 30, 2010. The 7.2% decrease in net revenues for the year ended June 30, 2011 was due primarily to decreased Medicare, self-pay, and commercial and other revenues offset slightly by increases in Medicaid revenues. Medicaid net revenues increased less than 1% from the fiscal year ended June 30, 2010. Net revenues for the fiscal year ended June 30, 2011 included revenues of $709 for the settlements and filings of prior year Medicare and Medicaid cost reports compared to net revenue of $1,201 for the fiscal year ended June 30, 2010. Net revenue for the fiscal year ended June 30, 2011 and 2010, included net revenues of $3,461 and $4,803 respectively, from state indigent care programs. Net outpatient service revenues decreased $8,764, a 14.3% decrease from the fiscal year ended June 30, 2010 to $52,712, and decreased to 46.1% of net revenues from 49.8% for the fiscal year ended June 30, 2010.
Net revenues for the year ended June 30, 2010 were $123,360 with a total of 17,511 equivalent admissions and revenues per equivalent admission of $7,045 compared to net revenues of $116,831, a total of 17,477 equivalent admissions and revenues per equivalent admission of $6,685 for the year ended June 30, 2009. The 5.6% increase in net revenues for the year ended June 30, 2010 was due primarily to increased Medicare, self pay and commercial and other revenues offset by decreases and Medicaid revenues, a 5.7% increase in net revenues per equivalent admission and increased revenue from settlements and filings of prior year Medicare and Medicaid cost reports. Net revenues for the fiscal year ended June 30, 2010 included revenues of $1,201 for the settlements and filings of prior year Medicare and Medicaid cost reports compared to net revenue of $394 for the fiscal year ended June 30, 2009. Self-pay revenues increased due to fewer patients having insurance and increased deductibles and co-insurance for insured patients. Self-pay revenues increased 41.5% in the fiscal year ended June 30, 2010 and commercial revenues increased 2.2%. Net outpatient service revenues increased $3,866, a 6.7% increase from June 30, 2009 to $61,476, and increased to 49.8% of net revenues from 49.3% the fiscal year ended June 30, 2009.
The following table sets forth the percentage of net patient revenues from major payors for the Healthcare Facilities Segment for the periods indicated:
Fiscal Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Source |
||||||||||||
Medicare |
40.3 | % | 40.9 | % | 38.9 | % | ||||||
Medicaid |
13.1 | % | 12.6 | % | 11.6 | % | ||||||
Self pay |
15.2 | % | 15.9 | % | 17.6 | % | ||||||
Commercial Insurance & Other |
31.4 | % | 30.6 | % | 31.9 | % | ||||||
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|
|
|
|
|
|||||||
100.0 | % | 100.0 | % | 100.0 | % | |||||||
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A decrease in the number of doctors and the elimination of certain unprofitable services at three of SunLinks hospitals combined with an overall decline in volumes have contributed to the decrease in Healthcare Facilities Segment net revenues in the years ended June 30, 2012, 2011 and 2010, respectively. We experienced a net loss of two and five doctors during the fiscal years ended June 30, 2012 and 2011, respectively. During the fiscal year ended June 30, 2012, SunLink expensed $376 on physician guarantees and recruiting expenses
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compared to $278 last year. We also have expended approximately $6,245 for capital expenditures to upgrade services and facilities since July 1, 2009. We believe upgraded services and facilities can contribute to an increase in net revenue per equivalent by attracting new patients and may mitigate decreases in net revenues per equivalent admission by limiting the loss of patients to competition from other facilities. We continue to seek increased patient volume by attracting additional physicians to our hospitals, adding and upgrading the services offered by our hospitals on an as needed basis and improving our hospitals physical facilities based on the availability of capital resources and our assessment of expected return on capital.
Specialty Pharmacy Segment
Net revenues were $38,099, $39,920 and $42,962 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Fiscal 2012 net revenues decreased $1,821, or 4.6%, as compared to fiscal 2011 net revenues as a result of a net decline in pharmacy net revenues of $1,533 and a decrease in durable medical equipment sales of $288. Although retail pharmacy net revenues increased 19.1%, institutional pharmacy net revenues decreased 16.9%, primarily as a result of the net loss of pharmacy services contracts with a group of affiliated long-term care facilities, and infusion therapy net revenues decreased 10.6%, primarily related to one infusion therapy drug prescribed for premature babies at high risk for lung disease. Generally, Medicare and Medicaid reimbursement rates decreased in fiscal 2012 as compared to the prior fiscal year contributing to the decline in net revenue. Fiscal 2011 net revenues decreased $3,042, or 7.1%, as compared to the fiscal prior year. The decrease was primarily a result of the loss of certain direct contracts for institutional pharmacy products and services of $2,731 and a decrease in durable medical equipment sales of $532.
Healthcare Facilities Segment Cost and Expenses
Costs and expenses for our Healthcare Facilities, including depreciation and amortization, were $97,746, $111,098, and $117,762, for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
Cost and Expenses | ||||||||||||
as a % of Net Revenue | ||||||||||||
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Salaries, wages and benefits |
49.1% | 46.9% | 44.8% | |||||||||
Provision for bad debts |
12.4% | 13.6% | 15.3% | |||||||||
Supplies |
8.9% | 9.5% | 9.8% | |||||||||
Purchased services |
7.3% | 7.5% | 6.8% | |||||||||
EHR incentive payments |
-8.4% | -0.2% | 0.0% | |||||||||
Other operating expenses |
15.0% | 14.2% | 12.6% | |||||||||
Rent and lease expense |
2.0% | 2.2% | 1.9% | |||||||||
Depreciation and amortization expense |
3.1% | 3.2% | 3.3% |
Salaries, wages and benefits expense as a percentage of total net revenues increased in the year ended June 30, 2012 compared to the prior year due to lower net patient revenues in the current year. Total salaries, wages and benefits expense actually decreased by $296, or 0.6%. Salaries, wages and benefits expense as a percentage of total net revenues increased in the year ended June 30, 2011 compared to the prior year due to lower net patient revenues in the current year. Salaries, wages and benefits expense decreased by $1,662, or 3.0% in year ended June 30, 2011 due to the lower staffing levels needed for the lower patient volume.
Provision for bad debts decreased as a percentage of net revenue in the year ended June 30, 2012 compared to the prior year due lower self-pay net revenues combined with increased charity care write offs in the current year compared to the prior year . Self-pay revenues decreased $1,741 or 9.6% in the current fiscal year. Provision for bad debts decreased as a percentage of net revenue in the year ended June 30, 2011 compared to the prior year due lower self-pay net revenues. Self-pay revenues decreased $3,569 or 16.4% in the year ended June 30, 2011.
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Supplies expense decreased as a percentage of net revenue in the year ended June 30, 2012 due to a decrease in the number of surgeries performed combined with overall decline in volume as compared to the prior year. Surgeries for the year ended June 30, 2012 were 2,077 compared to 2,400 for the prior year period. The elimination and reduction of services at selected hospitals of the Company also contributed to the decline in supplies expense.
EHR incentive payments as a percent of net revenue is a negative 8.4% for the fiscal year ended June 30, 2012 compared to a negative 0.2% for the fiscal year ended June 30, 2011. This is related to the $7,508 and $1,626, respectively, of Medicare and Medicaid EHR incentive payments recognized in the year ended June 30, 2012 compared to only $277 of Medicaid EHR incentive payments recognized in the prior year.
Other operating expenses increased as a percentage of net revenues in the year ended June 30, 2012 compared to the prior year due to lower net patient revenues in the current year. Total other operating expenses decreased $723, or 3.7%. Other operating expenses increased as a percentage of net revenues in the year ended June 30, 2011 compared to the prior year due to increased insurance expense. The increase in other operating expenses for fiscal year 2011 was also due to recording a new healthcare provider tax for our three Georgia healthcare facilities as other expense. Provider tax recorded in other expense was $2,659 and $2,162 for the fiscal years ended June 30, 2011 and 2010, respectively. States in which the Company operates hospitals imposed or increased their provider tax in 2011 and 2010.
Depreciation and amortization expense was $3,316, $3,675, and $4,040 for the years ended June 30, 2012, 2011 and, 2010, respectively. The decrease in fiscal year 2012 depreciation and amortization expense compared to fiscal year 2011 resulted from assets being fully depreciated in the current year as compared to prior years.
Specialty Pharmacy Segment Cost and Expenses
Cost and expenses for our Specialty Pharmacy Segment, including depreciation and amortization, was $37,640, $41,036 and $43,383 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
Cost and Expenses
as a % of Net Revenue Years Ended June 30, |
||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cost of goods sold |
68.4 | % | 69.7 | % | 68.8 | % | ||||||
Salaries, wages and benefits |
18.1 | % | 17.4 | % | 16.3 | % | ||||||
Provision for bad debts |
1.6 | % | 3.2 | % | 3.5 | % | ||||||
Supplies |
0.6 | % | 0.5 | % | 0.6 | % | ||||||
Purchased services |
3.5 | % | 3.7 | % | 4.1 | % | ||||||
Other operating expenses |
3.5 | % | 3.6 | % | 3.2 | % | ||||||
Rent and lease expense |
0.8 | % | 0.8 | % | 0.6 | % | ||||||
Depreciation and amortization expense |
2.1 | % | 3.9 | % | 3.8 | % |
Cost of goods sold as a percent of net revenues decreased in the fiscal year ended June 30, 2012 as compared to the prior fiscal year due to changes in sales product mix and favorable pricing negotiations and discounts earned with certain suppliers.
Salaries, wages and benefits increased as a percent of net revenues in fiscal 2012 as compared to the prior fiscal year primarily due to decreased net revenues. Salaries, wages and benefits expense decreased to $6,896 in 2012 from $6,939 in the prior year.
The decrease in the provision for bad debts as a percent of net revenues during fiscal 2012 as compared to the prior fiscal year resulted from of the implementation of improved business office operational and procedural
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controls and practices and is being realized in enhanced claims management, improved collections of accounts receivable and reduced uncollectible account write-offs.
Depreciation and amortization expense decreased for fiscal year 2012 due to impairment of certain intangible assets during fiscal year 2011 which decreased the amount of annual amortization on the remaining intangible assets. Amortization expense for the year ended June 30, 2012 was $142 compared to $585 for the comparable prior year period.
Corporate Overhead Costs and Expenses
Cost and expenses for Corporate Overhead including depreciation and amortization, was $5,380, $5,496 and $5,065 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The decrease in the fiscal year ended June 30, 2012 from the prior year was due primarily to $483 of severance expense paid for corporate employees during fiscal year 2011 that was not a recurring expense in fiscal year 2012. In addition, expenses related to a review of strategic alternatives decreased in the year ended June 30, 2012 from $427 in 2011 to $169 in 2012, partially offset by increases in depreciation expense and stock option compensation expense in the current year. The increase in the fiscal year ended June 30, 2011 from the prior year was due primarily to $483 of severance expense paid for four corporate employees.
Impairment of Goodwill and Intangible Assets
The Company performed an interim impairment testing of the goodwill and certain intangible assets of its subsidiaries in the third quarter of fiscal year 2012. The Company concluded that the carrying value of the Healthmont, LLC subsidiary, part of the Healthcare Facilities Segment, exceeded its fair value, and as a result, recognized a goodwill impairment charge of $931 for such subsidiary for the fiscal year ended June 30, 2012.
As part of the fiscal 2011 goodwill and intangibles impairment analysis, the Company recognized that there had been a decline in the revenues and operating profit from the Specialty Pharmacy Segment. The analysis resulted in a $6,048 goodwill impairment charge for fiscal 2011 for goodwill resulting from the April 2008 acquisition of the Specialty Pharmacy Segment. Additionally, the Company recognized a $3,400 impairment charge to trade name and a $3,899 impairment charge to customer relationships acquired in the April 2008 acquisition of the Specialty Pharmacy Segment for the fiscal year ended June 30, 2011. Declines in pharmacy products and services revenues during the fiscal year ended June 30, 2011 resulted from the loss of direct sales contracts for institutional pharmacy products and lower retail demand. Eight long-term care facilities converted their supply contracts to pharmacy management contracts in the fourth quarter of fiscal 2011 and these pharmacy management contracts yield lower operating profit margins for the Specialty Pharmacy Segment. The continuing distressed local economy of Carmichaels service area has resulted in lower sales for retail pharmacy and durable medical equipment products and we projected these lower sales volumes will continue.
The following table summarizes goodwill and intangible asset impairment charges for the fiscal year ended June 30, 2011:
June 30,
2011 |
||||
Specialty Pharmacy Segment |
||||
Goodwill |
$ | 6,048 | ||
Intangible assets |
||||
Trade Name |
3,400 | |||
Customer Relationships |
3,899 | |||
|
|
|||
Total |
$ | 13,347 | ||
|
|
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Impairment of Construction in Progress
In August 2007, the Company received final approval of a CON application with the State of Georgia to build a replacement hospital in Ellijay, Georgia and incurred CON application costs, land use, architecture and building consultants costs which were capitalized as construction in progress. SunLink exercised its option to purchase land in Ellijay to build the replacement hospital; however, the owner failed to close. We are currently in litigation with the owner and are pursuing a claim for damages against the owner based upon the owners failure to close the sale as agreed. The outcome of the litigation is uncertain. During the year ended June 30, 2009, SunLink expensed $433 of costs which had been capitalized relating to the land. During the fiscal year ended June 30, 2010, an additional $1,202 that had been incurred and capitalized prior to June 30, 2009 was expensed. These capitalized costs relate to CON, architecture and building consultants costs for the projected building site. The project to build a replacement hospital in Ellijay, Georgia at a site other than the existing hospital location is now considered remote due to the difficulty in obtaining a suitable building site. The Company is considering alternatives for upgrading the facilities at the existing hospital site.
Operating Profit
Operating profit was $5,908 for the year ended June 30, 2012, operating loss was $16,597 for the year ended June 30, 2011, and operating profit for the year end June 30, 2010 was $2,457. The operating profit in the year ended June 30, 2012 compared to the operating loss in the prior year was due to $9,134 of EHR incentive payments recognized during fiscal year 2012 and an impairment charge of $6,048 against goodwill and $7,299 against intangible assets associated with the Specialty Pharmacy Segment during the year ended June 30, 2011. The net effect of the EHR incentives payments and the absence of an impairment charge for the Specialty Pharmacy Segment was partially offset by lower operating profit due to a decrease in net revenues for the Healthcare Facilities and Specialty Pharmacy Segments and a goodwill impairment charge of $931 for our Healthmont, LLC subsidiary.
Operating loss was $16,597 for the year ended June 30, 2011 and operating income was $2,457 and $4,842 for the years ended June 30, 2010 and, 2009, respectively. The operating loss in the year ended June 30, 2011 compared to the prior year was due to an impairment charge of $6,048 against goodwill and $7,299 against intangible assets associated with the Specialty Pharmacy Segment and lower operating profit due to the decrease in net revenues for the Healthcare Facilities and Specialty Pharmacy Segments.
Interest expense was $4,392, $7,433, and $3,471 for the years ended June 30, 2012, 2011 and, 2010, respectively. The decrease in interest expense during the year ended June 30, 2012 was due to an $8,000 prepayment on the term loan resulting in reduced interest expense which was partially offset by an increase in interest rates. The decrease also resulted from decreased waiver fees and non-cash amortization of costs and fees in the current year. The increase in fiscal year 2011 interest expense resulted from $1,485 in waiver fees paid under the Credit Facility Waiver, $990 of increased deferred financing cost amortization resulting from the change in the termination date of the Credit Facility and increased rates charged as a result of a Credit Facility waiver. As of June 30, 2012 and 2011, the outstanding balance on our credit agreement was $16,086 and $29,086, respectively. The outstanding balance on our revolving line of credit was $5,931 and $5,300 as of June 30, 2012 and 2011, respectively.
We recorded income tax expense of $858 ($758 federal tax expense and $100 state tax expense) for the year ended June 30, 2012 compared to income tax benefit of $8,609 ($8,188 federal tax benefit and $421 state tax benefit) for the year ended June 30, 2011 and income tax benefit of $578 ($420 federal tax benefit and $158 state tax benefit) for the year ended June 30, 2010. The $8,609 tax benefit for the year ended June 30, 2011 included a $7,775 deferred tax benefit resulting primarily from the pre-tax impairment of goodwill and intangible assets of $13,347 of the Specialty Pharmacy Segment and the receipt of Medicare EHR incentive reimbursement payments of $8,521 which were included in taxable income in the prior year but which were deferred from inclusion in pre-tax income in the prior year. The $578 federal tax benefit for the year ended June 30, 2010 included a $1,495 deferred tax benefit.
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We had an estimated net operating loss carry-forward for federal income tax purposes of approximately $12,580 at June 30, 2012. Use of this net operating loss carry-forward is subject to the limitation provisions of Internal Revenue Code Section 382. As a result, not all of the net operating loss carry-forward is available to offset federal taxable income in the current year. We have provided a valuation allowance for $2,045 of our $13,110 gross deferred tax asset (the majority of which is the net operating loss carry-forward for federal income tax purposes). Based upon managements assessment that it was more likely than not that a portion of the Companys deferred tax asset (primarily its net operating losses subject to limitation) would not be recovered, the Company established a valuation allowance for the portion of the domestic tax asset which may not be utilized.
Earnings from continuing operations were $652 ($0.07 earnings per fully diluted share) for the year ended June 30, 2012 compared to a loss from continuing operations of $15,416 ($1.90 loss per fully diluted share) for the year ended June 30, 2011 and loss from continuing operations of $422 ($0.05 loss per fully diluted share) for the year ended June 30, 2010. Earnings from continuing operations in fiscal year 2012 resulted from the recognition of $9,134 in EHR incentive payments and $3,041 decrease in interest from prior year. Loss from continuing operations in fiscal 2011 resulted from an impairment charge of $6,048 against goodwill and $7,299 against intangible assets associated with the Specialty Pharmacy Segment, decreased net revenues for the Specialty Pharmacy Segment and an increase in interest expense over the prior year. Loss from continuing operations in fiscal 2010 resulted from an increase in cost and expenses, especially provision for bad debts, other operating expenses and the increased impairment of construction in progress partially offset by the gain on sale of three home health businesses included in operating profit.
Earnings from discontinued operations of $429 for the year ended June 30, 2012 primarily resulted from $445 of pre-tax earnings on the operations of the held-for-sale Memorial and the $88 of pre-tax loss resulting from domestic pension items. Loss from discontinued operations of $687 for the year ended June 30, 2011 primarily resulted from $782 of pre-tax loss on the operations of Memorial, $347 of pre-tax earnings attributable to our former Mountainside operations due to the settlement of a lawsuit, $83 of pre-tax losses from domestic pension items and $286 of pre- tax losses from Chilton resulting from $724 of pre-tax loss from operations offset by $438 related to the pre-tax gain on the sale of the operations of Chilton. Earnings from discontinued operations of $524 for the year ended June 30, 2010 primarily resulted from $1,731 of pre-tax earnings attributable to our former Mountainside operations, $603 of pre-tax loss on the operations of Memorial, $464 of pre- tax benefit attributable to our former Housewares segmenr operations, primarily due to legal expenses, $71 of pre-tax losses resulting from domestic pension items and $134 of pre-tax losses from the operations of Chilton.
Net earnings for the year ended June 30, 2012 were $1,081 ($0.12 earnings per fully diluted share) compared to net loss for the year ended June 30, 2011 was $16,103 ($1.99 loss per fully diluted share) and net earnings of $102 ($0.01 per fully diluted share) for the year ended June 30, 2010.
Earnings before income taxes, interest, depreciation and amortization
Earnings before income taxes, interest, depreciation and amortization (EBITDA) represent the sum of income before income taxes, interest, depreciation and amortization. We understand that certain industry analysts and investors generally consider EBITDA to be one measure of the liquidity of a company, and it is presented to assist analysts and investors in analyzing the ability of a company to generate cash, service debt and meet capital requirements. We believe increased EBITDA is an indicator of improved ability to service existing debt and to satisfy capital requirements. EBITDA, however, is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to net income as a measure of operating performance or to cash liquidity. Because EBITDA is not a measure determined in accordance with accounting principles generally accepted in the United States of America and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other corporations. Where we adjust EBITDA for non-cash charges we refer to such measurement as Adjusted EBITDA, which we report on a company wide basis. Non-cash adjustments in Adjusted EBITDA are
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not intended to be identified or characterized in any respect as non-recurring, infrequent or unusual, if we believe such charge is reasonably likely to recur within two years, or if there was a similar charge (or gain) within the prior two years. Where we report Adjusted EBITDA, we typically also report Hospital Facilities Segment Adjusted EBITDA and Specialty Pharmacy Segment Adjusted EBITDA which is the EBITDA for the applicable segments without any allocation of corporate overhead, which we report as a separate line item, and without any allocation of the non-cash adjustments, which we also report as a separate line item in Adjusted EBITDA. Net cash provided by operations for the years ended June 30, 2012, 2011 and 2010, respectively, is shown below.
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Healthcare Facilities Adjusted EBITDA |
$ | 14,801 | $ | 7,037 | $ | 12,435 | ||||||
Specialty Pharmacy Adjusted EBITDA |
1,273 | 446 | 1,215 | |||||||||
Corporate overhead costs |
(4,558 | ) | (5,036 | ) | (5,069 | ) | ||||||
Taxes and net interest expense |
(5,165 | ) | 1,298 | (2,814 | ) | |||||||
Other non-cash expenses and net changes in operating assets and liabilities |
(3,269 | ) | 1,034 | (1,839 | ) | |||||||
|
|
|
|
|
|
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Net cash provided by operations |
$ | 3,082 | $ | 4,779 | $ | 3,928 | ||||||
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Liquidity and Capital Resources
Our primary sources of liquidity are cash generated from continuing operations and availability under the Revolving Loan under our Credit Facility which is discussed below. Subject to the risks and uncertainties discussed herein, we believe we have adequate financing and liquidity to support our current level of operations through the next twelve months.
On April 23, 2008, SunLink entered into a $47,000 seven-year senior secured credit facility (Credit Facility) initially comprised of a revolving line of credit of up to $12,000 (the Revolving Loan) and a $35,000 term loan (the Term Loan). The Credit Facility has subsequently been amended by three modification agreements. The termination date for the Credit Facility currently is January 1, 2013 and the maximum Revolving Loan commitment currently is $9,000. At June 30, 2012, SunLinks calculated net collectible value of eligible accounts receivable was $8,093, the Revolving Loan balance was $5,931 with an interest rate at LIBOR plus 9.375% (12.125% at June 30, 2012), and the Term Loan balance was $8,886 with an interest rate at LIBOR plus 11.32% (14.07% at June 30, 2012). Borrowings under the Credit Facility are at LIBOR plus the applicable interest rate. Under the Credit Facility, LIBOR is defined as the Thirty-Day published rate, not to be less than 2.75%, nor more than 5.50%. The maximum availability of the Revolving Loan is keyed to the calculated net collectible value of eligible accounts receivable.
The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated subsidiaries, including a pledge of all of the equity interests in such subsidiaries (except for Callaway Community Hospital (Callaway) which is a second lien on the real and personal property). The Credit Facility contains various terms and conditions, including operational and financial restrictions and limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require SunLink to comply with maximum leverage and minimum fixed charge ratios, maximum capital expenditure amounts, collateral value to loan amount and liquidity and cash flow measures, all as defined in the Credit Facility.
We believe that the Company should be able to continue in compliance with the revised levels of financial covenants and terms in the Credit Facility through January 1, 2013, the facility termination date, but there is no assurance that the Company will be able to do so. The Term Loan under the Credit Facility had a balance of $16,086 at June 30, 2012. Subsequent to year end, $15,000 was paid down on the Term Loan consisting of
64
$7,500 of proceeds from the sale of Memorial and $7,500 of proceeds from the closing of the Callaway RDA Loan. An additional $1,000 was paid on the Revolving Loan subsequent to year end using proceeds from the sale of Memorial. The Term Loan and Revolving Loan balances at September 10, 2012 were $649 and $4,931, respectively. We are actively seeking refinancing options to refinance the Credit Facility by its termination date and also provide financing for the Companys liquidity needs. We believe we will be able to refinance the Credit Facility though facility-specific financing similar to what we have done at two facilities (Callaway Community Hospital in March 2012 and Trace Regional Hospital in July 2012). If we fail to remain in compliance with the Credit Facility as modified, we would cease to have a right to draw on the revolving line of credit facility and the lenders would, among other things, be entitled to call a default and demand repayment of the indebtedness outstanding. If SunLink or its applicable subsidiaries experience a material adverse change in their business, assets, financial condition, management or operations, or if the value of the collateral securing the Credit Facility decreases, we may be unable to draw on the Revolving Loan.
We also believe our current level of operations will allow us to continue to borrow under the Revolving Loan if we otherwise remain in compliance with all of the current terms and covenants under the Credit Facility. Failure to remain in compliance with all the terms of and covenants under the Credit Facility could have adverse material effects on the Company. The current remaining availability under the Revolving Loan could be adversely affected by, among other things, the risk, uncertainties and other factors listed in Item 3. Quantitative and Qualitative Disclosures about Market Risk (Item 3), as well as lower earnings due to lower demand for our services by patients, changes in patient mix and changes in terms and levels of government and private reimbursement for services. Cash generated from operations could be adversely affected by, among other things, the risks, uncertainties and other factors listed in Item 3, as well as lower patient demand for our services, higher operating costs (including, but not limited to, salaries, wages and benefits, provisions for bad debts, general liability and other insurance costs, cost of pharmaceutical drugs and other operating expenses) or by changes in terms and levels of government and private reimbursement for services, and the regulatory environment of the community hospital segment.
On May 3, 2012, the Company entered into the Fifth Modification to the Credit Facility. The Fifth Modification contained, among other things, the consent by the lenders under the Credit Facility to the sale of substantially all of the assets of Memorial for approximately $8,300 and required that the net proceeds of approximately $7,500 to the Company be applied to pay down the Term Loan under the Credit Facility.
On May 4, 2012, the Company entered into the Sixth Modification. The Sixth Modification was in response to, among other things, the SECs requirement that Medicare and Medicaid EHR incentive payments be accounted under the gain contingency accounting model rather than the grant accounting model and the resulting restatement of the Companys financial statements. Pursuant to the Sixth Modification, the lenders under the Credit Facility, among other things, consented to the continuing computation of Medicare and Medicaid EHR incentive payments under the grant accounting model for purposes of computing compliance with the Companys financial covenants under the Credit Facility notwithstanding such restatement of the Companys financial statements and waived any noncompliance that may have resulted by reason of such restatement of the Companys financial statements and prior use of the grant accounting model rather than the gain contingency model.
On June 29, 2012, the Company entered into the Seventh Modification to the Credit Facility. The Seventh Modification provided that Union Bank, National Association (f/k/a Union Bank of California, N.A.) was assigning to certain affiliates of Chatham all of its interest in the Loans and the Collateral, delegating to certain affiliates of Chatham its Revolving Commitment and other duties with respect to such Loans and Collateral, and resigning as Funding Agent.
On July 5, 2012, the Company entered into the Eighth Modification to the Credit Facility. The Eighth Modification contained, among other things, the consent by the lenders under the Credit Facility for the Companys indirect wholly-owned subsidiary Health Corporation of Houston, Inc. (SHCH) to enter into a
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$9,975 Mortgage Loan Agreement dated as of July 5, 2012 (Trace RDA Loan) and a $1,000 Working Capital Loan Agreement dated as of July 5, 2012 (Trace Working Capital Loan) with Stillwater National Bank and Trust Company (Stillwater). The Eighth Modification also provides for approximately $8,500 of the Trace RDA Loan proceeds be used to refinance a portion of the Companys senior debt under the Term Loan under the Credit Facility.
On March 26, 2012, SunLink, HealthMont of Missouri, LLC (HOM), and HealthMont LLC (HLLC), the direct parent of HOM, entered into and closed on a $5,000 Loan Agreement with a bank dated as of March 16, 2012 (the Callaway RDA Loan). The loan is guaranteed by the Company and HLLC. HealthMont of Missouri, LLC owns and operates Callaway Community Hospital (Callaway) in Fulton, Missouri. The Loan Agreement consists of a $4,000 term loan and $1,000 construction loan. The $4,000 term loan was drawn in its entirety on March 26, 2012. As of June 30, 2012, $388 has been drawn on the $1,000 construction loan with the commencement of construction and improvement projects.
The Callaway RDA Loan has a term of 25 years with monthly payments of principal and interest until repaid. The Callaway RDA Loan bears interest at a floating interest rate computed as the prime rate (as published in The Wall Street Journal) plus 2%. The Callaway RDA Loan is collateralized by Callaways real estate and equipment and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. Of the Callaway RDA Loan proceeds, $3,250 was applied as payment against the Companys senior debt under the Term Loan under the Companys Credit Facility. Approximately $1,000 of the Callaway RDA Loan proceeds will be used to finance improvements, including to provide an inpatient geriatric psychiatry unit at Callaway, with the remainder of the Callaway RDA Loan proceeds used for working capital and closing costs. The Callaway RDA Loan contains certain financial covenants with respect to the Borrowers Current Ratio of current assets to current liabilities and Debt Service Coverage, all as defined in the Callaway RDA Loan Agreement, that the Borrower must maintain and that are measured at the end of each fiscal year. The Callaway RDA Loan is guaranteed by HLLC and the Company.
On July 11, 2012, SunLink, SunLink Healthcare, LLC (SHL) and SHCH, an indirect wholly-owned subsidiary of the Company, closed on the $9,975 Trace RDA Loan and the $1,000 Trace Working Capital Loan, each dated as of July 5, 2012. SHCH owns and operates Trace Regional Hospital (Trace) in Houston, Mississippi. Both the Trace RDA Loan and the Trace Working Capital Loan were unconditionally guaranteed by the Company and SHL, a wholly-owned intermediate holding company.
The Trace RDA Loan has a term of 15 years with monthly payments of principal and interest until repaid. The Trace RDA Loan bears a floating rate of interest equal to the greater of (i) the prime rate (as published in The Wall Street Journal) plus 1.5%, or (ii) 6%. The Trace RDA Loan is collateralized by Traces real estate and equipment and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. Approximately $8,500 of the Trace RDA Loan proceeds were used to refinance a portion of the Companys senior debt under the Term Loan under the Credit Facility. Approximately $850 of the Trace RDA Loan proceeds will be used for improvements to the hospital and its medical office building with the remainder of the Trace RDA Loan proceeds used for working capital and closing costs. The Trace RDA Loan contains covenants which SunLink believes are customary to similar loan agreements as well as certain financial covenants with respect to SHCHs current ratio of current assets to current liabilities and debt service coverage, fixed charge coverage and funded debt to EBITDA, all as defined in the Trace RDA Loan Agreement.
We generated $3,082 of cash from operations during the year ended June 30, 2012. Cash was generated from net earnings, non-cash expenses of impairment and depreciation and amortization, and cash generated from discontinued operations. We generated $4,779 of cash from operations during the year ended June 30, 2011. Cash was generated from the receipt of $8,521 in EHR incentive reimbursements received in May 2011.
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Contractual Obligations, Commitments and Contingencies
Contractual obligations related to long-term debt, non-cancelable operating leases and interest on outstanding debt from continuing operations at June 30, 2012 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect at June 30, 2012.
Payments due in: |
Long-Term
Debt |
Subordinated
Long-Term Debt |
Operating
Leases |
Interest
on
Long-Term Debt |
Interest
on
Subordinated Long-Term Debt |
Physician
Guarantees |
||||||||||||||||||
1 year |
$ | 9,051 | $ | 300 | $ | 3,031 | $ | 1,725 | $ | 184 | $ | 91 | ||||||||||||
2 years |
476 | 300 | 905 | 620 | 160 | 91 | ||||||||||||||||||
3 years |
469 | 1,852 | 641 | 250 | 74 | 15 | ||||||||||||||||||
4 years |
496 | | 477 | 582 | | |||||||||||||||||||
5 years |
515 | | 300 | 552 | | |||||||||||||||||||
More than 5 years |
9,631 | | 467 | 4,125 | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 20,638 | $ | 2,452 | $ | 5,821 | $ | 7,854 | $ | 418 | $ | 197 | |||||||||||||
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|
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|
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At June 30, 2012, SunLink had guarantee agreements with three physicians. A physician with whom a guarantee agreement is made generally agrees to maintain his or her practice within a hospital geographic area for a specific period (normally three years) or be liable to repay all or a portion of the guarantee received. The physicians liability for any guarantee repayment due to non-compliance with the provisions of a guarantee agreement generally is collateralized by the physicians patient accounts receivable and/or a promissory note from the physician. Included in the Companys consolidated balance sheet at June 30, 2012 is a liability of $197 for one physician guarantee. SunLink expensed $375, $278, and $458, for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Noncancelable commitments under these contracts as of June 30, 2012 are presented in the schedule above.
At June 30, 2012, we had outstanding long-term debt of $20,638 of which $16,086 was incurred in connection with the Credit Facility, $4,376 was incurred with connection to the Callaway RDA Loan and $176 was related to capital leases. At June 30, 2011, we had outstanding long-term debt of $29,255 of which $29,086 was incurred in connection with the Credit Facility and $169 was related to capital leases.
Subsequent to June 30, 2012, $15,000 was repaid on the Term Loan consisting of $7,500 of proceeds from the sale of Memorial and $7,500 of proceeds from the closing of the Callaway RDA Loan. $1,000 was paid on the Revolving Loan subsequent to year end using proceeds from the sale of Memorial. The Term Loan and Revolving Loan balances at September 10, 2012 were $649 and $4,931, respectively.
On December 7, 2007, Southern Health Corporation of Ellijay, Inc. (SHC-Ellijay) filed a Complaint against James P. Garrett and Roberta Mundy, both individually and as Fiduciary of the Estate of Randy Mundy (collectively, Defendants), seeking specific performance of an Option Agreement (the Option Agreement) dated April 17, 2007, between SHC-Ellijay, Mr. Garrett, and Ms. Mundy as Executrix of the Estate of Randy Mundy for the sale of approximately 24.74 acres of real property located in Gilmer County, Georgia, and recovery of SHC-Ellijays damages suffered as a result of Defendants failure to close the transaction in accordance with the Option Agreement. SHC-Ellijay also stated alternative claims for breach of the Option Agreement and fraud, along with claims to recover attorneys fees and punitive damages.
In January 2008, Defendants filed motions to strike, motions to dismiss, answers, affirmative defenses, and a counterclaim against SHC-Ellijay. On March 3, 2009, SHC-Ellijay filed a First Amended and Restated Complaint for Damages, which effectively dropped the cause of action for specific performance of the Option Agreement. On May 7, 2009, Mr. Garrett and Ms. Mundy served a motion for summary judgment on all counts and causes of action stated in the First Amended Complaint. The court has postponed consideration of the
67
defendants motion for summary judgment and SHC-Ellijays response thereto until after a discovery dispute between the parties was resolved. After further motions and argument, the parties eventually completed discovery.
On May 12, 2011, SHC-Ellijay filed a motion for partial summary judgment as to Defendants liability for breaches of contract and for summary judgment denying Defendants counterclaims. On June 10, 2011, Defendants filed a response in opposition to SHC-Ellijays motion and a cross motion for summary judgment. On July 27, 2011, SHC-Ellijay filed a reply brief in further support of its motion for partial summary judgment on the complaint and full summary judgment on the Defendants counterclaims and brief in opposition to Defendants cross motion for summary judgment.
On April 11, 2012, the Court entered an Order granting SHC-Ellijays motion for partial summary judgment and denying Defendants motions for summary judgment. On or about April 23, 2012, Defendants filed a notice of appeal to the Georgia Court of Appeals. Defendants filed their Brief of Appellants on July 30, 2012. SHC-Ellijay filed its Brief of Appellee on August 21, 2012. The case remains pending before the Georgia Court of Appeals.
SunLink denies that it has any liability to Defendants and intends to vigorously defend the claims asserted against SunLink by the Defendants complaint and to vigorously pursue its claims against the Defendants. While the ultimate outcome and materiality of the litigation cannot be determined, in managements opinion the litigation will not have a material adverse effect on SunLinks financial condition or results of operations.
SunLink is a party to claims and litigation incidental to its business, for which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.
Recent Accounting Pronouncements
In July 2011, the FASB issued ASU 2011-7, Health Care Entities (Topic 954)Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-7). In accordance with ASU 2011-7, the Company will be required to present its provision for doubtful accounts related to patient service revenue as a deduction from revenue, similar to contractual discounts. Accordingly, the Companys revenues will be required to be reported net of both contractual discounts as well as its provision for doubtful accounts related to patient service revenues. Additionally, ASU 2011-7 will require the Company to make certain additional disclosures designed to help users understand how contractual discounts and bad debts affect recorded revenue in both interim and annual financial statements. ASU 2011-7 is required to be applied retrospectively and is effective for public companies for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. Early adoption is permitted. The Company anticipates applying the provisions of ASU 2011-7 for its fiscal year ending June 30, 2013. The adoption of ASU 2011-7 is not expected to impact the Companys financial position, results of operations or cash flows although it will change the presentation of the Companys revenues on its statements of operations as well as requiring additional disclosures.
In June 2011, the FASB issued ASU 2011-5, Comprehensive Income (Topic 220)Presentation of Comprehensive Income (ASU 2011-5). ASU 2011-5 eliminates the Companys currently elected option to present components of other comprehensive income as part of the statement of changes in stockholders equity. Instead, ASU 2011-5 requires that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-5 is required to be applied retrospectively and is effective for public companies for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. Early adoption is permitted. The Company
68
anticipates applying the provisions of ASU 2011-5 for its fiscal year ending June 30, 2013. The adoption of ASU 2011-5 is not expected to impact the Companys financial position, results of operations or cash flows prospectively.
Related Party Transactions
A director of the Company and the Companys secretary are members of two different law firms, each of which provides services to SunLink. We have paid an aggregate of $1,092, $896, and $596 to these law firms in the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Included in the Companys consolidated balance sheet at June 30, 2012 and 2011 is $644 and $205, respectively, of amounts payable to these law firms.
Inflation
During periods of inflation and labor shortages, employee wages increase and suppliers pass along rising costs to us in the form of higher prices for their supplies and services. We have not always been able to offset increases in operating costs by increasing prices for our services and products or by implementing cost control measures. We are unable to predict our ability to control future cost increases or offset future cost increases by passing along the increased cost to customers.
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Item 8. |
Financial Statements and Supplementary Data. |
Index to Financial Statements and Supplementary Data
Page | ||||
F-1 | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
Consolidated Statements of Cash Flowsfor each of the three years ended June 30, 2012, 2011 and 2010 |
F-5 | |||
F-6 |
Item 9A. |
Controls and Procedures. |
Disclosure Controls and Procedures We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Changes in Internal Controls over Financial Reporting There were no changes to our internal control over financial reporting during the year ended June 30, 2012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Section 404(b) Section 404(a) of the Sarbanes-Oxley Act of 2002 (SOX) requires annual reports on Form 10-K to contain a report from management on the effectiveness of an issuers internal control over financial reporting. Separately, Section 404(b) generally requires an issuers regular auditor to attest to and report on managements assessment. However, Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently exempted non-accelerated filers, including smaller reporting companies from the requirements of Section 404(b). Accordingly, this annual report does not include any attestation and report from SunLinks independent registered public accounting firm with respect to the effectiveness of the Companys internal controls over financial reporting.
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PART IV
Item 15. Exhibits, Financial Statement Schedules .
(a) (1) Financial Statements
The following consolidated financial statements of the Company and its subsidiaries are set forth in Item 8 of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm. |
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Consolidated Balance SheetsJune 30, 2012 and 2011. |
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Consolidated Statements of Earnings and LossFor the Years Ended June 30, 2012, 2011 and 2010. |
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Consolidated Statements of Shareholders EquityFor the Years Ended June 30, 2012, 2011 and 2010. |
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Consolidated Statements of Cash FlowsFor the Years Ended June 30, 2012, 2011 and 2010. |
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Notes to Consolidated Financial StatementsFor the Years Ended June 30, 2012, 2011 and 2010. |
(a) (2) Financial Statement Schedules
Report of Independent Registered Public Accounting Firm |
||||
Schedule II Valuation and Qualifying Accounts |
At page 78 of this Report |
The information required to be submitted in Schedules I, III, IV and V for SunLink Health Systems, Inc. and its consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or not required under Regulation S-X and, therefore, has been omitted.
(a) (3) See Item 15(b) below. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit is identified below by an asterisk.
(b) Exhibits
The following exhibits are filed with this Form 10-K or incorporated herein by reference from the document set forth next to the exhibit in the list below. Exhibit numbers refer to Item 601 of Regulation S-K:
3.1 |
Amended Articles of Incorporation of SunLink Health Systems, Inc. (incorporated by reference from Exhibit 3.1 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
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3.2 |
Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.2 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
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3.3 |
Certificate of Amendment to Amend Article Fourth of the Amended Articles of Incorporation of SunLink Health Systems, Inc. dated February 13, 2004 (incorporated by reference from Exhibit 3.1 of the Companys Report on Form 10-Q for the quarter ended December 31, 2003). (Commission File No. 04610446) |
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4.1 |
Shareholder Rights Agreement dated as of February 8, 2004, between SunLink Health Systems, Inc. and Wachovia Bank, N.A., as Rights Agent (incorporated by reference from Exhibit 4.1 of the Companys Report on Form 8-K filed February 10, 2004). (Commission File No. 04582922) |
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10.1 | * |
2001 Long-Term Stock Option Plan (incorporated by reference from Exhibit 10.5 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
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10.2 | * |
2001 Outside Directors Stock Ownership and Stock Option Plan (incorporated by reference from Exhibit 10.6 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
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10.3 | * |
Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of SunLinks Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210) |
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10.4 | * |
Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Companys Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094) |
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10.5 |
Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated April 23, 2008 (incorporated by reference from Exhibit 10.29 of the Companys Report on Form 8-K filed April 29, 2008). (Commission File No. 08787122) |
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10.6 | * |
2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Companys Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389) |
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10.7 |
Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Companys Report on Form 8-K filed July 16, 2007). (Commission File No. 07982325) |
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10.8 | * |
Employment Letter dated September 30, 2002, by and between SunLink Healthcare Corp. and Jack M. Spurr, Jr. (incorporated by reference from Exhibit 10.27 of the Companys Report on Form 10-K dated September 24, 2007). (Commission File No. 017732454) |
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10.9 |
Amended and Restated Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC and Union Bank of California, N.A. dated August 1, 2008 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2009). (Commission File No. 081091964) |
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10.10 |
Limited Waiver Agreement Under Amended and Restated Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated September 27, 2010 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2010). (Commission File No. 101119914) |
72
10.11 |
Limited Consent and Modification of Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated March 1, 2011 (incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011). (Commission File No. 11842673) |
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10.12 |
Purchase and Sale Agreement between Central Alabama Medical Associates, LLC and Clanton Hospital, LLC dated March 1, 2011 (incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011). (Commission File No. 11842673) |
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10.13 |
Third Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated July 28, 2011 (incorporated by reference from Exhibit 10.9 to Current Report on Form 8-K filed August 1, 2011). (Commission File No. 111000498) |
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10.14 |
Lease Agreement between Central Alabama Medical Associates, LLC and Clanton Hospital, LLC dated March 1, 2011 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
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10.15 | * |
Management Services Agreement dated November 15, 2010, by and between SunLink Health Systems, Inc. and Centric Management Services Co., LLC (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
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10.16 | * |
Employment letter dated September 23, 2010 with an effective date of September 30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
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10.17 |
Loan Agreement dated as of March 19, 2012 by and among Pioneer Bank, SSB; HealthMont of Missouri, LLC; HealthMont, LLC; and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
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10.18 |
Promissory Note in the amount of $4,000,000 dated as of March 19, 2012 from Healthmont of Missouri, LLC payable to Pioneer Bank, S.S.B. (incorporated by reference from Exhibit 10.2 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
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10.19 |
Promissory Note in the amount of $1,000,000 dated as of March 19, 2012 from Healthmont of Missouri, LLC payable to Pioneer Bank, S.S.B. (incorporated by reference from Exhibit 10.3 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
73
10.20 |
Fourth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated March 19, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
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10.21 |
Fifth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated May 3, 2012. (incorporated by reference from Exhibit 99.3 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
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10.22 |
Sixth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated May 4, 2012. (incorporated by reference from Exhibit 99.4 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
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10.23 |
Seventh Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC, dated June 29, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K filed July 13, 2012). (Commission File No. 12961359) |
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10.24 |
Eighth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC, dated July 5, 2012. (incorporated by reference from Exhibit 99.3 to Current Report on Form 8-K filed July 13, 2012). (Commission File No. 12961359) |
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10.25 |
Asset Purchase Agreement By and Among HealthMont of Georgia, Inc., SunLink Health Systems, Inc. and Hospital Authority of Tift County, Georgia as of March 1, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K/A filed July 5, 2012). (Commission File No. 12961359) |
74
10.26 |
Mortgage Loan Agreement dated as of July 5, 2012, by and between Stillwater National Bank and Southern Health Corporation of Houston, Inc. ^ |
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10.27 |
Working Capital Loan Agreement dated as of July 5, 2012, by and between Stillwater National Bank and Southern Health Corporation of Houston, Inc. ^ |
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21.1 |
List of Subsidiaries ^ |
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23.1 |
Consent of Cherry, Bekaert & Holland, L.L.P. ^ |
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31.1 |
Chief Executive Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.^ |
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31.2 |
Chief Financial Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.^ |
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32.1 |
Chief Executive Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^ |
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32.2 |
Chief Financial Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^ |
* |
Management contract or compensatory plan or arrangement. |
^ |
Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SunLink Health Systems, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 20th day of September, 2012.
S UNLINK H EALTH S YSTEMS , I NC . |
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By: | /s/ R OBERT M. T HORNTON , J R . | |
Robert M. Thornton, Jr.
Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of SunLink Health Systems, Inc. and in the capacities and on the dates indicated:
Name |
Title |
Date |
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/s/ R OBERT M. T HORNTON , J R . Robert M. Thornton, Jr. |
Director, Chairman, President and Chief Executive Officer (principal executive officer) |
September 20, 2012 | ||
/s/ M ARK J. S TOCKSLAGER Mark J. Stockslager |
Chief Financial Officer and Principal Accounting Officer (principal accounting officer) |
September 20, 2012 | ||
/s/ S TEVEN J. B AILEYS , D.D.S. Steven J. Baileys, D.D.S. |
Director |
September 20, 2012 | ||
/s/ K AREN B. B RENNER Karen B. Brenner |
Director |
September 20, 2012 | ||
/s/ G ENE E. B URLESON Gene E. Burleson |
Director |
September 20, 2012 | ||
/s/ C. M ICHAEL F ORD C. Michael Ford |
Director |
September 20, 2012 | ||
/s/ M ICHAEL H ALL Michael Hall |
Director |
September 20, 2012 | ||
/s/ C HRISTOPHER H. B. M ILLS Christopher H. B. Mills |
Director |
September 20, 2012 | ||
/s/ H OWARD E. T URNER Howard E. Turner |
Director |
September 20, 2012 |
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
SunLink Health Systems, Inc.
We have audited the consolidated financial statements of SunLink Health Systems, Inc. and subsidiaries (the Company) as of June 30, 2012 and 2011 and for each of the years in the three-year period ended June 30, 2012 and have issued our report thereon dated September 20, 2012; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 15 for each of the years in the three-year period ended June 30, 2012. These consolidated financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/Cherry, Bekaert & Holland, L.L.P.
Atlanta, Georgia
September 20, 2012
77
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Column A |
Column B | Column C | Column D | Column E | ||||||||||||||||
Allowance for Doubtful Accounts |
Balance at
Beginning Of Year |
Charged to
Cost and Expenses |
Currency
Translation/ Acquisition/ (Disposition) |
Deductions
from Reserves |
Balance at
End of Year |
|||||||||||||||
Year Ended June 30, 2012 |
$ | 12,317 | $ | 17,411 | $ | | $ | (20,607 | ) | $ | 9,121 | |||||||||
Year Ended June 30, 2011 |
$ | 14,725 | $ | 22,230 | $ | (2,305 | ) | $ | (22,333 | ) | $ | 12,317 | ||||||||
Year Ended June 30, 2010 |
$ | 12,795 | $ | 22,592 | $ | | $ | (20,662 | ) | $ | 14,725 | |||||||||
Deferred Income
|
Balance at
Beginning Of Year |
Charged to
Cost and Expenses/ (Benefit) |
Currency
Translation/ Acquisition/ (Disposition) |
Deductions
from Reserves |
Balance at
End of Year |
|||||||||||||||
Year Ended June 30, 2012 |
$ | 2,078 | $ | 123 | $ | | $ | (156 | ) | $ | 2,045 | |||||||||
Year Ended June 30, 2011 |
$ | 1,350 | $ | 728 | $ | | $ | | $ | 2,078 | ||||||||||
Year Ended June 30, 2010 |
$ | 2,724 | $ | (86 | ) | $ | | $ | (1,288 | ) | $ | 1,350 |
78
INDEX TO EXHIBITS
3.1 |
Amended Articles of Incorporation of SunLink Health Systems, Inc. (incorporated by reference from Exhibit 3.1 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
|||
3.2 |
Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.2 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
|||
3.3 |
Certificate of Amendment to Amend Article Fourth of the Amended Articles of Incorporation of SunLink Health Systems, Inc. dated February 13, 2004 (incorporated by reference from Exhibit 3.1 of the Companys Report on Form 10-Q for the quarter ended December 31, 2003). (Commission File No. 04610446) |
|||
4.1 |
Shareholder Rights Agreement dated as of February 8, 2004, between SunLink Health Systems, Inc. and Wachovia Bank, N.A., as Rights Agent (incorporated by reference from Exhibit 4.1 of the Companys Report on Form 8-K filed February 10, 2004). (Commission File No. 04582922) |
|||
10.1 | * |
2001 Long-Term Stock Option Plan (incorporated by reference from Exhibit 10.5 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
||
10.2 | * |
2001 Outside Directors Stock Ownership and Stock Option Plan (incorporated by reference from Exhibit 10.6 of the Companys Report on Form 10-Q for the quarter ended September 30, 2001). (Commission File No. 1789180) |
||
10.3 | * |
Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of SunLinks Form 10-Q for the quarter ended September 30, 2005). (Commission File No. 051197210) |
||
10.4 | * |
Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Companys Report on Form 8-K filed December 23, 2005). (Commission File No. 051285094) |
||
10.5 |
Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated April 23, 2008 (incorporated by reference from Exhibit 10.29 of the Companys Report on Form 8-K filed April 29, 2008). (Commission File No. 08787122) |
|||
10.6 | * |
2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Companys Registration Statement on Form S-8 filed September 20, 2006). (Commission File No. 061100389) |
||
10.7 |
Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Companys Report on Form 8-K filed July 16, 2007). (Commission File No. 07982325) |
|||
10.8 | * |
Employment Letter dated September 30, 2002, by and between SunLink Healthcare Corp. and Jack M. Spurr, Jr. (incorporated by reference from Exhibit 10.27 of the Companys Report on Form 10-K dated September 24, 2007). (Commission File No. 017732454) |
79
10.9 |
Amended and Restated Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC and Union Bank of California, N.A. dated August 1, 2008 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2009). (Commission File No. 081091964) |
|||
10.10 |
Limited Waiver Agreement Under Amended and Restated Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated September 27, 2010 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2010). (Commission File No. 101119914) |
|||
10.11 |
Limited Consent and Modification of Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated March 1, 2011 (incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011). (Commission File No. 11842673) |
|||
10.12 |
Purchase and Sale Agreement between Central Alabama Medical Associates, LLC and Clanton Hospital, LLC dated March 1, 2011 (incorporated by reference from the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011). (Commission File No. 11842673) |
|||
10.13 |
Third Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated July 28, 2011 (incorporated by reference from Exhibit 10.9 to Current Report on Form 8-K filed August 1, 2011). (Commission File No. 111000498) |
|||
10.14 |
Lease Agreement between Central Alabama Medical Associates, LLC and Clanton Hospital, LLC dated March 1, 2011 (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
|||
10.15 | * |
Management Services Agreement dated November 15, 2010, by and between SunLink Health Systems, Inc. and Centric Management Services Co., LLC (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
80
10.16 | * |
Employment letter dated September 23, 2010 with an effective date of September 30, 2010, by and between SunLink ScriptsRx, LLC and Byron D. Finn (incorporated by reference from the Companys Annual Report on Form 10-K for the year ended June 30, 2011). (Commission File No. 111108066) |
||
10.17 |
Loan Agreement dated as of March 19, 2012 by and among Pioneer Bank, SSB; HealthMont of Missouri, LLC; HealthMont, LLC; and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
|||
10.18 |
Promissory Note in the amount of $4,000,000 dated as of March 19, 2012 from Healthmont of Missouri, LLC payable to Pioneer Bank, S.S.B. (incorporated by reference from Exhibit 10.2 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
|||
10.19 |
Promissory Note in the amount of $1,000,000 dated as of March 19, 2012 from Healthmont of Missouri, LLC payable to Pioneer Bank, S.S.B. (incorporated by reference from Exhibit 10.3 to Current Report on Form 8-K filed March 29, 2012). (Commission File No. 12725101) |
|||
10.20 |
Fourth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated March 19, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
|||
10.21 |
Fifth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated May 3, 2012. (incorporated by reference from Exhibit 99.3 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
|||
10.22 |
Sixth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC dated May 4, 2012. (incorporated by reference from Exhibit 99.4 to Current Report on Form 8-K filed May 8, 2012). (Commission File No. 12823311) |
|||
10.23 |
Seventh Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC, dated June 29, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K filed July 13, 2012). (Commission File No. 12961359) |
81
10.24 |
Eighth Modification to Loan Documents between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink ScriptsRX, LLC, Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichaels Cashway Pharmacy, Inc., Carmichaels Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc., and Chatham Credit Management III, LLC, dated July 5, 2012. (incorporated by reference from Exhibit 99.3 to Current Report on Form 8-K filed July 13, 2012). (Commission File No. 12961359) |
|||
10.25 |
Asset Purchase Agreement By and Among HealthMont of Georgia, Inc., SunLink Health Systems, Inc. and Hospital Authority of Tift County, Georgia as of March 1, 2012. (incorporated by reference from Exhibit 99.2 to Current Report on Form 8-K/A filed July 5, 2012). (Commission File No. 12961359) |
|||
10.26 |
Mortgage Loan Agreement dated as of July 5, 2012, by and between Stillwater National Bank and Southern Health Corporation of Houston, Inc. ^ |
|||
10.27 |
Working Capital Loan Agreement dated as of July 5, 2012, by and between Stillwater National Bank and Southern Health Corporation of Houston, Inc. ^ |
|||
21.1 |
List of Subsidiaries ^ |
|||
23.1 |
Consent of Cherry, Bekaert & Holland, L.L.P. ^ |
|||
31.1 |
Chief Executive Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.^ |
|||
31.2 |
Chief Financial Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.^ |
|||
32.1 |
Chief Executive Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^ |
|||
32.2 |
Chief Financial Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.^ |
* |
Management contract or compensatory plan or arrangement. |
^ |
Filed herewith. |
82
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
SunLink Health Systems, Inc.
We have audited the accompanying consolidated balance sheets of SunLink Health Systems, Inc. and subsidiaries (the Company) as of June 30, 2012 and 2011 and the related consolidated statements of operations, shareholders equity, and cash flows for each of the years in the three-year period ended June 30, 2012. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included 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 consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/Cherry, Bekaert & Holland, L.L.P.
Atlanta, Georgia
September 20, 2012
F-1
SUNLINK HEALTH SYSTEMS, INC.
JUNE 30, 2012 AND 2011
(All Amounts in thousands)
See notes to consolidated financial statements.
F-2
SUNLINK HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND LOSS
FOR THE YEARS ENDED JUNE 30, 2012, 2011 and 2010
(All amounts in thousands, except per share amounts)
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net revenues |
$ | 146,674 | $ | 154,380 | $ | 166,322 | ||||||
Costs and expenses: |
||||||||||||
Cost of goods sold |
26,073 | 27,835 | 29,539 | |||||||||
Salaries, wages and benefits |
63,263 | 63,846 | 65,031 | |||||||||
Provision for bad debts |
14,024 | 16,841 | 20,364 | |||||||||
Supplies |
9,882 | 11,083 | 12,267 | |||||||||
Purchased services |
9,367 | 10,031 | 10,207 | |||||||||
Other operating expenses |
18,908 | 19,671 | 18,782 | |||||||||
Rents and leases expense |
2,775 | 2,903 | 2,691 | |||||||||
Impairment of goodwill and intangible assets |
931 | 13,347 | 0 | |||||||||
Impairment of construction in progress |
0 | 0 | 1,202 | |||||||||
Depreciation and amortization |
4,677 | 5,697 | 6,124 | |||||||||
Electronic Health Records incentives |
(9,134 | ) | (277 | ) | 0 | |||||||
Gain on sale of Home Health Businesses |
0 | 0 | (2,342 | ) | ||||||||
|
|
|
|
|
|
|||||||
Operating profit (loss) |
5,908 | (16,597 | ) | 2,457 | ||||||||
Other income (expense): |
||||||||||||
Interest expense |
(4,392 | ) | (7,433 | ) | (3,471 | ) | ||||||
Interest income |
14 | 5 | 14 | |||||||||
Loss on sale of assets |
(20 | ) | 0 | 0 | ||||||||
|
|
|
|
|
|
|||||||
Earnings (loss) from continuing operations before income taxes |
1,510 | (24,025 | ) | (1,000 | ) | |||||||
Income tax expense (benefit) |
858 | (8,609 | ) | (578 | ) | |||||||
|
|
|
|
|
|
|||||||
Earnings (loss) from continuing operations |
652 | (15,416 | ) | (422 | ) | |||||||
Earnings (loss) from discontinued operations, net of income taxes |
429 | (687 | ) | 524 | ||||||||
|
|
|
|
|
|
|||||||
Net earnings (loss) |
$ | 1,081 | $ | (16,103 | ) | $ | 102 | |||||
|
|
|
|
|
|
|||||||
Earnings (loss) per share: |
||||||||||||
Continuing operations: |
||||||||||||
Basic |
$ | 0.07 | $ | (1.90 | ) | $ | (0.05 | ) | ||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.07 | $ | (1.90 | ) | $ | (0.05 | ) | ||||
|
|
|
|
|
|
|||||||
Discontinued operations: |
||||||||||||
Basic |
$ | 0.05 | $ | (0.08 | ) | $ | 0.07 | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.05 | $ | (0.08 | ) | $ | 0.07 | |||||
|
|
|
|
|
|
|||||||
Net earnings (loss): |
||||||||||||
Basic |
$ | 0.12 | $ | (1.99 | ) | $ | 0.01 | |||||
|
|
|
|
|
|
|||||||
Diluted |
$ | 0.12 | $ | (1.99 | ) | $ | 0.01 | |||||
|
|
|
|
|
|
|||||||
Weighted-average common shares outstanding: |
||||||||||||
Basic |
9,350 | 8,094 | 8,052 | |||||||||
|
|
|
|
|
|
|||||||
Diluted |
9,350 | 8,094 | 8,052 | |||||||||
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
SUNLINK HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 2012, 2011 and 2010
(All amounts in thousands)
Common
Shares |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Noncontrolling
Interest |
Total
Shareholders Equity |
|||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
JUNE 30, 2009 |
8,050 | $ | 4,025 | $ | 11,626 | $ | 26,463 | $ | (337 | ) | $ | 615 | $ | 42,392 | ||||||||||||||
Net earnings |
0 | 0 | 0 | 102 | 0 | 102 | ||||||||||||||||||||||
Foreign currency translation adjustment |
0 | 0 | 0 | 0 | 46 | 46 | ||||||||||||||||||||||
Minimum pension liability adjustment, net of tax of $21 |
(10 | ) | (10 | ) | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total comprehensive income |
138 | |||||||||||||||||||||||||||
Share-based compensation |
0 | 0 | 40 | 0 | 0 | 0 | 40 | |||||||||||||||||||||
Common shares issued |
29 | 14 | 35 | 0 | 0 | 0 | 49 | |||||||||||||||||||||
Sale of noncontrolling interest |
0 | 0 | 0 | 0 | 0 | 73 | 73 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
JUNE 30, 2010 |
8,079 | 4,039 | 11,701 | 26,565 | (301 | ) | 688 | 42,692 | ||||||||||||||||||||
Net loss |
0 | 0 | 0 | (16,103 | ) | 0 | 0 | (16,103 | ) | |||||||||||||||||||
Minimum pension liability adjustment, net of tax of $6 |
23 | 23 | ||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total comprehensive loss |
(16,080 | ) | ||||||||||||||||||||||||||
Share-based compensation |
0 | 0 | 6 | 0 | 0 | 0 | 6 | |||||||||||||||||||||
Common shares issued |
41 | 21 | 44 | 0 | 0 | 0 | 65 | |||||||||||||||||||||
Change in noncontrolling interest |
0 | 0 | 0 | 0 | 0 | (615 | ) | (615 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
JUNE 30, 2011 |
8,120 | 4,060 | 11,751 | 10,462 | (278 | ) | 73 | 26,068 | ||||||||||||||||||||
Net earnings |
0 | 0 | 0 | 1,081 | 0 | 0 | 1,081 | |||||||||||||||||||||
Minimum pension liability adjustment, net of tax of $133 |
(219 | ) | (219 | ) | ||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Total comprehensive income |
862 | |||||||||||||||||||||||||||
Share-based compensation |
0 | 0 | 92 | 0 | 0 | 0 | 92 | |||||||||||||||||||||
Common shares issued |
1,328 | 664 | 1,678 | 0 | 0 | 0 | 2,342 | |||||||||||||||||||||
Change in noncontrolling interest |
0 | 0 | 0 | 0 | 0 | (73 | ) | (73 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
JUNE 30, 2012 |
9,448 | $ | 4,724 | $ | 13,521 | $ | 11,543 | $ | (497 | ) | $ | 0 | $ | 29,291 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
SUNLINK HEALTH SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2012, 2011 and 2010
(All amounts in thousands)
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net earnings (loss) |
$ | 1,081 | $ | (16,103 | ) | $ | 102 | |||||
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
4,677 | 5,697 | 6,124 | |||||||||
Share-based compensation |
92 | 6 | 41 | |||||||||
Impairment of goodwill and intangible assets |
931 | 13,347 | 0 | |||||||||
Impairment of construction in process |
0 | 0 | 1,202 | |||||||||
Loss on disposal of property, plant and equipment |
20 | 0 | 0 | |||||||||
Gain on sale of Chilton Medical Center |
0 | (438 | ) | 0 | ||||||||
Gain on sale of Home Health businesses |
0 | 0 | (2,342 | ) | ||||||||
Change in assets and liabilities: |
||||||||||||
Receivables |
3,000 | (265 | ) | 3,948 | ||||||||
Inventory |
193 | (164 | ) | (57 | ) | |||||||
Prepaid expenses and other assets |
578 | 1,250 | (1,104 | ) | ||||||||
Accounts payable and accrued expenses |
(1,790 | ) | 1,775 | (1,052 | ) | |||||||
Income taxes |
1,328 | (1,788 | ) | (1,058 | ) | |||||||
Deferred income taxes |
568 | (7,227 | ) | (735 | ) | |||||||
Third-party payor settlements |
33 | 210 | (617 | ) | ||||||||
Electronic Health Records deferred gain |
(8,348 | ) | 8,244 | 0 | ||||||||
Net activities of discontinued operations |
719 | 235 | (524 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
3,082 | 4,779 | 3,928 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||||
Expenditures for property, plant and equipmentcontinuing operations |
(1,589 | ) | (2,347 | ) | (2,309 | ) | ||||||
Expenditures for property, plant and equipmentdiscontinued operations |
(425 | ) | (293 | ) | (193 | ) | ||||||
Proceeds from sale of Home Health businesses |
0 | 0 | 3,300 | |||||||||
Proceeds from sale of noncontrolling interest |
0 | 0 | 73 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by investing activities |
(2,014 | ) | (2,640 | ) | 871 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from issuance of common shares |
2,342 | 65 | 49 | |||||||||
Proceeds from long-term debt |
4,388 | 0 | 0 | |||||||||
Payment of long-term debt |
(13,622 | ) | (1,958 | ) | (2,108 | ) | ||||||
Revolving advances, net |
631 | 5,300 | (3,400 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by financing activities |
(6,261 | ) | 3,407 | (5,459 | ) | |||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(5,193 | ) | 5,546 | (660 | ) | |||||||
CASH AND CASH EQUIVALENTS: |
||||||||||||
Beginning of year |
7,250 | 1,704 | 2,364 | |||||||||
|
|
|
|
|
|
|||||||
End of year |
$ | 2,057 | $ | 7,250 | $ | 1,704 | ||||||
|
|
|
|
|
|
|||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||||||
Cash paid for: |
||||||||||||
Income taxes |
$ | (1,242 | ) | $ | 356 | $ | 1,548 | |||||
|
|
|
|
|
|
|||||||
Interest |
$ | 4,029 | $ | 4,025 | $ | 3,103 | ||||||
|
|
|
|
|
|
|||||||
Non-cash investing and financing activities: |
||||||||||||
Assets acquired under capital lease obligationcontinuing operations |
$ | 80 | $ | 205 | $ | 0 | ||||||
|
|
|
|
|
|
|||||||
Assets acquired under capital lease obligationdiscontinued operations |
$ | 349 | $ | 0 | $ | 0 | ||||||
|
|
|
|
|
|
|||||||
Long-term debt issued as payment-in-kind for interest payable |
$ | 105 | $ | 247 | $ | 0 | ||||||
|
|
|
|
|
|
F-5
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED JUNE 30, 2012, 2011 and 2010
(All amounts in thousands, except share and per share amounts)
1. BUSINESS OPERATIONS
SunLink Health Systems, Inc. (SunLink, we, our, ours, us or the Company) is a provider of healthcare services in certain markets in the United States. SunLinks business is composed of two business segments:
|
Healthcare Facilities, which consists of |
|
Our five community hospitals which have a total of 282 licensed beds; |
|
Our two nursing homes, each of which is located adjacent to a corresponding SunLink community hospital which have a total of 166 licensed beds; and |
|
Our one home health agency which operates for a corresponding SunLink community hospital. |
|
Specialty Pharmacy, which consists of |
|
Specialty pharmacy services; |
|
Durable medical equipment; |
|
Institutional pharmacy services; and |
|
Retail pharmacy products and services, all of which are conducted in rural markets. |
We also own a hospital building which we lease to a third party. The third party has the option to purchase the facility.
SunLink has conducted its healthcare facilities business since 2001 and its specialty pharmacy operations since April 2008. Our Specialty Pharmacy Segment currently is operated through Carmichaels Cashway Pharmacy, Inc. (Carmichael), a subsidiary of our SunLink ScriptsRx, LLC subsidiary, and is composed of a specialty pharmacy business acquired in April 2008 with four service lines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation The consolidated financial statements include the accounts of SunLink and its domestic and foreign subsidiaries, all of which are 100% owned. All significant intercompany transactions and balances have been eliminated.
Management 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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable and intangible assets, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.
Net Patient Service Revenue SunLink has agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and
F-6
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2012, there were no material claims or disputes with third-party payors.
Charity Care SunLink provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because SunLink does not pursue collection of amounts determined to qualify as charity, they are not reported as revenue. SunLink provided $9,958, $6,545, and $4,238, of charity care in the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
Concentrations of Credit Risk SunLink grants unsecured credit to its patients, most of who reside in the service area of SunLinks facilities and are insured under third-party agreements. Although SunLinks two Georgia facilities generated approximately 42%, 45%, and 47% of gross revenues for the years ended June 30, 2012, 2011 and 2010, respectively, because of the geographic diversity of SunLinks facilities and nongovernmental third-party payors, Medicare and Medicaid accounts represent SunLinks only significant concentrations of credit risk. For SunLinks Healthcare Facilities Segment, Medicare net revenues were approximately 40%, 41%, and 39% of net revenues for the years ended June 30, 2012, 2011 and 2010, respectively. For SunLinks Healthcare Facilities Segment, Medicaid was approximately 13%, 13%, and 12% of net revenues for the years ended June 30, 2012, 2011 and 2010, respectively. For SunLinks Healthcare Facilities Segment, Medicare receivables were approximately 37% and 36% of receivablesnet at June 30, 2012 and 2011, respectively, while Medicaid receivables were approximately 22% and 26% of receivablesnet at June 30, 2012 and 2011, respectively.
Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid financial instruments, which have original maturities of three months or less when purchased. Cash is deposited with commercial banks and may have deposits totaling amounts in excess of the federally insured limits from time to time.
Inventory Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or market. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.
Allowance for Doubtful Accounts Substantially all of SunLinks receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to customers. Accounts receivable are reduced by an allowance for doubtful accounts estimated to become uncollectible in the future. For its Healthcare Facilities, the Company calculates an allowance percentage based generally upon its historical collection experience for each type of payor. The allowance amount is computed by applying allowance percentages to receivable amounts included in specific payor categories. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to determine the allowance for doubtful accounts. Accounts receivable are written off after all collection efforts have failed, normally within 120 days after the date of discharge of the patient or service to the patient or customer. For its Pharmacy Operations, the Company calculates an allowance percentage based on past credit history with customers and their current financial condition. Accounts receivable are written off against the allowance for doubtful accounts when they are deemed uncollectible.
Medicare and Medicaid Electronic Health Records (EHR) Incentives The Company accounts for EHR incentive payments in accordance with Accounting Standards Codification 450-30, Gain Contingencies,
F-7
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(ASC 450-30). In accordance with ASC 450-30, the Company recognizes EHR incentive payments when all contingencies relating to the incentive payment have been satisfied and compliance with the EHR meaningful use criteria have been attested to. For recognition of Medicaid EHR incentive payments, recognition of the payments will be at the time of attestation to EHR meaningful use criteria since Medicaid payments for the states in which the Company operates are based upon historical cost report information with no subsequent payment adjustment. However, for Medicare EHR incentive payments, recognition is being deferred until both the Medicare federal fiscal year during which EHR meaningful use was demonstrated ends and the cost report information utilized to determine the final amount of reimbursement is known. The demonstration of meaningful use is based on meeting a series of objectives and varies among hospitals, between the Medicare and Medicaid programs, and within the Medicaid program from state to state. Additionally, meeting the series of objectives in order to demonstrate meaningful use becomes progressively more stringent as its implementation is phased in through stages as outlined by the Centers for Medicare and Medicaid Services.
Incentive payments for Medicare meaningful use will be recognized once the Medicare EHR meaningful use attestation has been successfully completed and all information utilized to calculate the amounts of incentive reimbursement payments is known. Incentive payments for Medicaid meaningful use will be recognized once the Medicaid EHR meaningful use attestation has been successfully completed and all information utilized to calculate the amounts of incentive reimbursement payments is known. Medicaid EHR incentive payments will be recognized as gains upon completion of successful attestation of meaningful use and notification of the payment amount is verified with Medicaid.
Property, Plant, and Equipment Property, plant, and equipment, including equipment subject to capital leases, are recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 3 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful life, whichever is shorter, of the asset and range from 5 to 15 years. For our Specialty Pharmacy Segment, durable medical equipment is depreciated over 3 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $4,520, $5,085, and $5,337, for the years ended June 30, 2012, 2011 and 2010, respectively.
Risk Management SunLink is exposed to various risks of loss from medical malpractice and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters.
When, in managements judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries except where applicable laws, rules or regulations require us to report the gross estimate of potential or estimated losses.
By virtue of the acquisition of its initial six hospitals, SunLink assumed responsibility for professional liability claims reported after the February 1, 2001 acquisition date and the previous owner retained responsibility for all known and filed claims prior to the acquisition date. SunLink purchased claims-made commercial insurance for acts prior to and after the acquisition date. The recorded liability for professional liability risks includes an estimate of the liability for claims incurred prior to February 1, 2001, but reported after
F-8
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
February 1, 2001, and for claims incurred after February 1, 2001. These amounts are based on actuarially determined estimates.In connection with the acquisition of HealthMont LLC (HealthMont) and its two hospitals, SunLink assumed responsibility for all professional liability claims. HealthMont had purchased claims-made commercial insurance for claims made prior to the acquisition and SunLink purchased claims-made commercial insurance for claims made after the acquisition. The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition. These amounts are based on actuarially determined estimates.
The Company self-insures for workers compensation risk. The estimated liability for workers compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. Since October 1, 2006, the Company is self-insured for employee health risks. The estimated liability for employee health risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.
The Company accrues an estimate of losses resulting from workers compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon managements review of claims reported and historical loss data.
The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink, if any, we revise estimated reserves as additional facts become known.
Long-lived Assets SunLink periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjusts the carrying value of the asset to estimated fair value. These factors, along with managements plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.
Goodwill and Intangibles Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. Goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink evaluates the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant.
Income Taxes SunLink accounts for income taxes using an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SunLink considers all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.
Share-Based Compensation The Company issues common share options to key employees and directors under various shareholder-approved plans. Share-based compensation expense of $92, $6 and $41 for the fiscal years ended June 30, 2012, 2011 and 2010, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company. The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.
F-9
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Fair Value of Financial Instruments The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of long-term debt is estimated to approximate the recorded value due to its current variable interest rate.
Fair Value Measurements Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company utilizes the U.S. GAAP fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entitys own assumption about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The inputs used to measure fair value are classified into the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Companys own assumptions.
In instances where the determination of the fair value hierarchy measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment of factors specific to the asset or liability.
Earnings (Loss) per Share Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLinks 1995 Incentive Stock Option Plan, 2001 Long-Term Stock Option Plan, 2001 Outside Directors Stock Ownership and Stock Option Plan, the 2005 Equity Incentive Plan, and the 2011 Director Stock Option Plan. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options.
Recent Accounting Pronouncements In July 2011, the FASB issued ASU 2011-7, Health Care Entities (Topic 954)Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (ASU 2011-7). In accordance with ASU 2011-7, the Company will be required to present its provision for doubtful accounts related to patient service revenue as a deduction from revenue, similar to contractual discounts. Accordingly, the Companys revenues will be required to be reported net of both contractual discounts as well as its provision for doubtful accounts related to patient service revenues. Additionally, ASU 2011-7 will require the Company to make certain additional disclosures designed to help users understand how contractual discounts and bad debts affect recorded revenue in both interim and annual financial statements. ASU 2011-7 is required to be applied retrospectively and is effective for public companies for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. Early adoption is permitted. The Company anticipates applying the provisions of ASU 2011-7 for its fiscal year ending June 30, 2013. The adoption of ASU 2011-7 is not expected to impact the Companys financial position, results of operations or cash flows although it will change the presentation of the Companys revenues on its statements of earnings as well as requiring additional disclosures.
F-10
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In June 2011, the FASB issued ASU 2011-5, Comprehensive Income (Topic 220)Presentation of Comprehensive Income (ASU 2011-5). ASU 2011-5 eliminates the Companys currently elected option to present components of other comprehensive income as part of the statement of changes in stockholders equity. Instead, ASU 2011-5 requires that all non-owner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-5 is required to be applied retrospectively and is effective for public companies for fiscal years beginning after December 15, 2011, and interim periods within those fiscal years. Early adoption is permitted. The Company anticipates applying the provisions of ASU 2011-5 for its fiscal year ending June 30, 2013. The adoption of ASU 2011-5 is not expected to impact the Companys financial position, results of operations or cash flows prospectively.
3. |
SUBSEQUENT EVENTS |
On July 2, 2012, the Company and its HealthMont of Georgia, Inc. subsidiary completed the sale of substantially of all the assets of the Companys owned Memorial Hospital of Adel and Memorial Convalescent Center (collectively Memorial) to Hospital Authority of Tift County, Georgia (Tift) for approximately $8,350. SunLink and its HealthMont of Georgia, Inc. subsidiary entered into an Asset Purchase Agreement by and among HealthMont of Georgia, Inc., Excluded assets include accounts receivable as of the March 31, 2012 (Cutoff Date) and all Medicare and Medicaid incentive payments (EHR Funds) for meaningful use of electronic health record technology and all receivables, claims and settlements made pursuant to the Indigent Care Trust Fund of the State of Georgia (ICTF) paid with respect to the State of Georgias fiscal year ended June 30, 2012. Retained liabilities consist of liabilities incurred prior to the closing date of the transaction. The net proceeds from the sale of approximately $7,500 were used to repay a portion of the Companys senior debt under the Term Loan under the Companys Credit Facility.
On July 11, 2012, SunLink, SunLink Healthcare, LLC (SHL) and Southern Health Corporation of Houston, Inc. (SHCH), an indirect wholly-owned subsidiary of the Company, closed on a $9,975 Mortgage Loan Agreement dated as of July 5, 2012 (Trace RDA Loan) and a $1,000 Working Capital Loan Agreement dated as of July 5, 2012 (Trace Working Capital Loan) with Stillwater National Bank and Trust Company (Stillwater). SHCH owns and operates Trace Regional Hospital (Trace) in Houston, Mississippi. Both the Trace RDA Loan and the Trace Working Capital Loan were unconditionally guaranteed by the Company and SunLink Healthcare LLC (SHL), a wholly-owned intermediate holding company.
The Trace RDA Loan has a term of 15 years with monthly payments of principal and interest until repaid. The Trace RDA Loan bears a floating rate of interest equal to the greater of (i) the prime rate (as published in The Wall Street Journal) plus 1.5%, or (ii) 6%. The Trace RDA Loan is collateralized by Traces real estate and equipment and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. Approximately $8,500 of the Trace RDA Loan proceeds were used to repay a portion of the Companys senior debt under the Term Loan under the Credit Facility. Approximately $850 of the Trace RDA Loan proceeds will be used for improvements to the hospital and its medical office building with the remainder of the Trace RDA Loan proceeds used for working capital and closing costs. The Trace RDA Loan contains covenants which SunLink believes are customary to similar loan agreements as well as certain financial covenants with respect to SHCHs current ratio of current assets to current liabilities and debt service coverage, fixed charge coverage and funded debt to EBITDA, all as defined in the Trace RDA Loan Agreement.
4. |
DISCONTINUED OPERATIONS |
All of the businesses discussed below are reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation.
F-11
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Memorial Hospital of Adel On July 2, 2012, the Company and its HealthMont of Georgia, Inc. subsidiary completed the sale of substantially of all the assets of Memorial to Tift for approximately $8,350. The net proceeds from the sale of approximately $7,500 were used to repay a portion of the Companys senior debt under the Term Loan under the Companys Credit Facility.
Memorials operations have been reclassified as discontinued operations in our consolidated financial statements as of and for the fiscal year ended June 30, 2012, 2011 and 2010.
Chilton Medical Center On March 1, 2011, SunLink entered into an agreement to sell its 83% membership interest in its Clanton Hospital LLC (Clanton) subsidiary, which operated Chilton Medical Center (Chilton), to Carraway Medical Systems, Inc. (Carraway) and to lease the physical facility to Carraway. The lease agreement is for a six-year term with monthly rent of $37 and includes an option under which Carraway can purchase the physical facility from SunLink. The option purchase price is $3,700, less the amount paid to purchase the 17% membership interest of Clanton that Carraway does not currently own, up to a maximum of $615. The purchase price of SunLinks 83% membership interest in Clanton was a $1,000 six-year zero-coupon note plus a six-year 6% note for the net working capital of Clanton at purchase. If the purchase option for the physical facility is exercised during the six-year term of the lease, any amount paid under the $1,000 note will be credited to the option purchase price and any remaining balance on the note will be cancelled. As a result, the note at June 30, 2012 and 2011 was recorded on the balance sheet at net $0. Pursuant to the terms of the sale and lease agreement, SunLink is entitled to receive 75% of the Electronic Health Records Medicare incentive reimbursement received with respect to Chilton. The Company received $188 of Medicaid EHR funds with respect to Chilton in the fourth fiscal quarter of 2012 and $790 of Medicare EHR incentive payments in the fourth fiscal quarter of 2011.
Housewares Segment All claims in a liquidation proceeding with respect to SunLinks former Housewares segment were settled on April 13, 2010. In connection with the settlement of such claim SunLink paid approximately $1,400, of which $480 was covered under a directors and officers insurance policy. The Company cancelled all preferred stock of its SunLink subsidiary held by the former Housewares segment subsidiary. The pre-tax loss of $464 for the fiscal year ended June 30, 2010 resulted from legal expenses incurred.
Mountainside Medical Center On June 1, 2004, SunLink sold its Mountainside Medical Center (Mountainside) hospital in Jasper, Georgia, for approximately $40,000 pursuant to the terms of an asset sale agreement. In connection with this sale, claims by the buyer and counter claims by SunLink were litigated which resulted in a judgment for SunLink. The judgment, which included damages, prejudgment interest and certain losses, was collected by SunLink in the amount of $1,246 in May 2010 and $540 in December 2010, and the parties executed a mutual release. Included in the pre-tax earnings of Mountainside for the fiscal year ended June 30, 2011 is the judgment of $540 related to the litigation. Also included in pre-tax earnings for the fiscal year ended June 30, 2011 were legal expenses of $194 related to the litigation. Included in the pre-tax earnings of Mountainside for the fiscal year ended June 30, 2010 was the judgment of $1,829, composed of a total of a $1,560 payment plus $266 of accrued judgment interest. Also included in pre-tax earnings for the fiscal year ended June 30, 2010 were legal expenses related to the litigation with the buyer claim and SunLinks counterclaim.
Life Sciences and Engineering Segment SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when the segment was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the fiscal years ended June 30, 2012, 2011 and 2010.
F-12
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Discontinued Operations Reserves Over the past 23 years SunLink has discontinued operations carried on by its former Chilton Medical Center, Mountainside Medical Center and its former industrial, U.K. leisure marine, life sciences and engineering, and European child safety segments, as well as the U.K. housewares segment. SunLinks reserves related to discontinued operations of these segments represent managements best estimate of SunLinks possible liability for property, product liability and other claims for which SunLink may incur liability. With the settlement of litigation related to the Housewares Segment and Mountainside during fiscal year 2010, no reserve for discontinued operations has been included in the Companys consolidated balance sheets since June 30, 2010.
The following is a summary of the loss reserves for discontinued operations:
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Beginning balance |
$ | 0 | $ | 0 | $ | 643 | ||||||
Usage |
0 | 0 | (643 | ) | ||||||||
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|
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|
|||||||
$ | 0 | $ | 0 | $ | 0 | |||||||
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|
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|
|
Results of discontinued operations were as follows:
Discontinued OperationsSummary Statement of Earnings Information
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Net Revenues: |
||||||||||||
Memorial |
$ | 18,031 | $ | 17,856 | $ | 16,844 | ||||||
Chilton |
0 | 9,447 | 14,615 | |||||||||
|
|
|
|
|
|
|||||||
Net revenues |
$ | 18,031 | $ | 27,303 | $ | 31,459 | ||||||
|
|
|
|
|
|
|||||||
Earnings (Loss) Before Income Taxes: |
||||||||||||
Memorial |
$ | 445 | $ | (782 | ) | $ | (603 | ) | ||||
Chilton |
0 | (724 | ) | (134 | ) | |||||||
Life sciences and engineering |
(88 | ) | (83 | ) | (71 | ) | ||||||
Mountainside |
1 | 347 | 1,731 | |||||||||
Housewares |
0 | 0 | (464 | ) | ||||||||
|
|
|
|
|
|
|||||||
Earnings (loss) before income taxes |
358 | (1,242 | ) | 459 | ||||||||
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|
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|
|
|
|||||||
Gain on SaleChilton Medical Center |
0 | 438 | 0 | |||||||||
|
|
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|
|
|
|||||||
Income tax benefit |
71 | 117 | 65 | |||||||||
|
|
|
|
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|
|||||||
Earnings (loss) from discontinued operations |
$ | 429 | $ | (687 | ) | $ | 524 | |||||
|
|
|
|
|
|
5. |
NET RECEIVABLES |
SunLink has agreements with third-party payors that provide for payments at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows:
Medicare Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per Diagnosis Related Group. These rates vary according to a patient classification system that is
F-13
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
based on clinical, diagnostic, and other factors. Inpatient nonacute services, certain outpatient services, and defined capital and medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology. Cost reimbursable items are paid at a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary.
Medicaid Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed either under contracted rates or reimbursed for cost reimbursable items at a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicaid fiscal intermediary.
Other SunLink also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, 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.
Summary information for receivables is as follows:
June 30, | ||||||||
2012 | 2011 | |||||||
Patient accounts receivable (net of contractual allowance) |
$ | 22,349 | $ | 28,619 | ||||
Less allowance for doubtful accounts |
(9,121 | ) | (12,317 | ) | ||||
|
|
|
|
|||||
Patient accounts receivable (net of allowances) |
$ | 13,228 | $ | 16,302 | ||||
|
|
|
|
Net revenues included $510, $709, and $1,201, for the years ended June 30, 2012, 2011 and 2010, respectively, for the settlements and filings of prior year Medicare and Medicaid cost reports.
6. |
MEDICARE AND MEDICAID ELECTRONIC HEALTH RECORDS INCENTIVES DEFERRED GAINMEDICARE ELECTRONIC HEALTH RECORDS INCENTIVES |
EHR incentive reimbursements are payments received under the Health Information Technology for Economic and Clinical Health Act (the HITECH Act) which was enacted into law on February 17, 2009 as part of the American Recovery and Reinvestment Act of 2009 (ARRA). The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. Beginning with federal fiscal year 2011 (federal fiscal year is October 1 through September 30) and extending through federal fiscal year 2016, eligible hospitals and critical access hospitals (CAH) participating in the Medicare and Medicaid programs are eligible for reimbursement incentives based on successfully demonstrating meaningful use of their certified EHR technology. Conversely, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to payment penalties or downward adjustments to their Medicare payments beginning in federal fiscal year 2015.
SunLinks five operating hospitals and Memorial and Chilton (see Note 4.Discontinued Operations) successfully attested for the Medicare EHR program for the fiscal year ended June 30, 2011. Incentive payments for all five operating hospital and Memorial and Chilton totaling $8,521 were received by SunLink during the quarter ended June 30, 2011. As Medicare EHR incentive payments cannot be recognized until the cost report information utilized to determine the final amount of reimbursement is known, SunLink recorded the $8,521 as deferred gain as of June 30, 2011. This deferred gain was recognized in the quarter ended June 30, 2012, when information for the cost report period July 1, 2011 through June 30, 2012 was known. Based on revised estimates using June 30, 2012 information, a receivable of $103 was recorded as of June 30, 2012. This amount will be collected upon final settlement of cost reports for fiscal year 2012. SunLinks hospital in Mississippi successfully
F-14
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
attested for the Medicaid EHR program in the quarter ended June 30, 2011. SunLinks two Missouri hospitals, its two Georgia hospitals and Chilton successfully attested for the Medicaid EHR program for the federal attestation year ended September 30, 2011 and recognized EHR incentive payments in the fiscal year ended June 30, 2012. Medicaid EHR incentive reimbursement payments were received for SunLinks five operating hospitals and Memorial and Chilton during the fiscal year ended June 30, 2012 totaling $2,080.
EHR incentive payments recognized in continuing operations for the years ending June 30, 2012 and 2011 are as follows:
2012 | 2011 | |||||||
Medicare |
$ | 7,508 | $ | 0 | ||||
Medicaid |
1,626 | 277 | ||||||
|
|
|
|
|||||
$ | 9,134 | $ | 277 | |||||
|
|
|
|
EHR incentive payments recognized in discontinued operations for the year ended June 30, 2012 for Medicare and Medicaid were $1,116 and $454, respectively. No EHR incentive payments were recognized in discontinued operations for the year ended June 30, 2011.
7. |
INVENTORY |
Consisted of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
Healthcare Facilities Segment Supplies Inventory |
$ | 2,116 | $ | 2,121 | ||||
Specialty Pharamcy Segment Goods Held for Sale |
2,062 | 2,250 | ||||||
|
|
|
|
|||||
$ | 4,178 | $ | 4,371 | |||||
|
|
|
|
8. |
GOODWILL AND INTANGIBLE ASSETS |
SunLink has goodwill related to its Healthmont and Carmichael acquisitions. We have intangible assets related to these acquisitions, as well. We also have intangible assets related to two Healthcare Facilities Segment clinic purchases.
Goodwill consists of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
Specialty Pharamcy Segment |
$ | 461 | $ | 461 | ||||
Healthcare Facilities Segment |
0 | 931 | ||||||
|
|
|
|
|||||
$ | 461 | $ | 1,392 | |||||
|
|
|
|
F-15
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Intangible assets consist of the following, net of amortization:
June 30,
2012 |
June 30,
2011 |
|||||||
Healthcare Facilities Segment |
||||||||
Certificates of Need |
$ | 80 | $ | 80 | ||||
Noncompetition Agreements |
83 | 83 | ||||||
|
|
|
|
|||||
163 | 163 | |||||||
Accumulated Amortization |
(106 | ) | (91 | ) | ||||
|
|
|
|
|||||
57 | 72 | |||||||
|
|
|
|
|||||
Specialty Pharmacy Segment |
||||||||
Trade Name |
2,000 | 2,000 | ||||||
Customer Relationships |
1,089 | 1,089 | ||||||
Medicare License |
769 | 769 | ||||||
|
|
|
|
|||||
3,858 | 3,858 | |||||||
Accumulated Amortization |
(595 | ) | (453 | ) | ||||
|
|
|
|
|||||
3,263 | 3,405 | |||||||
|
|
|
|
|||||
Total |
$ | 3,320 | $ | 3,477 | ||||
|
|
|
|
The trade name intangible asset under the Specialty Pharmacy Segment is a non-amortizing intangible asset.
Amortization expense was $157, $612, and $787, for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
Annual amortization of amortizing intangibles for the next five years and thereafter is as follows:
2013 |
$ | 145 | ||
2014 |
145 | |||
2015 |
145 | |||
2016 |
145 | |||
2017 |
145 | |||
2018 and thereafter |
595 | |||
|
|
|||
Total |
$ | 1,320 | ||
|
|
Impairment analysis For the purposes of these analyses, our estimates of fair value are based on a combination of the income approach, which estimates the fair value based on future discounted cash flows, and the market approach, which estimates the fair value of based on comparable market prices. Estimates of fair value for reporting units fall under Level 3 of the fair value hierarchy. Estimates of future discounted cash flows are based on assumptions and projections we believe to be currently reasonable and supportable. These assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.
During the third quarter of fiscal 2012, the Company performed an interim impairment testing of the goodwill and certain intangible assets of its subsidiaries as March 31, 2012. The Company concluded that the carrying value of the subsidiary exceeded its fair value, and as a result, recognized a goodwill impairment charge of $931 for its Healthmont, LLC subsidiary, part of the Healthcare Facilities Segment, during the year ended June 30, 2012.
F-16
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the fourth quarter of fiscal 2011, we completed our annual impairment testing of goodwill and certain intangible assets. The analysis resulted in a goodwill impairment charge of $6,048 related to the Specialty Pharmacy Segment for fiscal 2011. Additionally, the Company recognized a $3,400 impairment charge to trade name and a $3,899 impairment charge to customer relationships for the fiscal year ended June 30, 2011 for the Specialty Pharmacy Segment. The decline in fair value of our Specialty Pharmacy Segment below its book value was is primarily the result of lower than expected revenue and customer growth relative to the assumptions made at the acquisition date.
The following table summarized goodwill and intangible asset impairment charges for the fiscal year ended June 30, 2011:
June 30, | ||||
2011 | ||||
Specialty Pharmacy Segment |
||||
Goodwill |
$ | 6,048 | ||
Intangible assets |
||||
Trade Name |
3,400 | |||
Customer Relationships |
3,899 | |||
|
|
|||
Total |
$ | 13,347 | ||
|
|
9. |
LONG-TERM DEBT AND REVOLVING LINE OF CREDIT |
Long-term debt consisted of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
Term Loan |
$ | 16,086 | $ | 29,086 | ||||
Callaway RDA Loan |
4,376 | 0 | ||||||
Capital lease obligations |
176 | 169 | ||||||
|
|
|
|
|||||
Total |
20,638 | 29,255 | ||||||
Less current maturities |
(9,050 | ) | (1,814 | ) | ||||
|
|
|
|
|||||
$ | 11,588 | $ | 27,441 | |||||
|
|
|
|
SunLink Credit Facility On April 23, 2008, SunLink entered into a $47,000 seven-year senior secured credit facility (Credit Facility) initially comprised of a revolving line of credit of up to $12,000 (the Revolving Loan) and a $35,000 term loan (the Term Loan). The Credit Facility has subsequently been amended by eight modification agreements as a result of which the Revolving Loan commitment was reduced to $9,000 effective September 27, 2010 and the termination date was changed to January 1, 2013 effective July 28, 2011. At June 30, 2012, the Revolving Loan balance was $5,931 with an interest rate at LIBOR plus 9.375% (12.125% at June 30, 2012) and the Term Loan had an outstanding balance of $16,086 with an interest rate at LIBOR plus 11.32% (14.07% at June 30, 2012). In the Credit Facility, LIBOR is defined as the Thirty-Day published rate, not to be less than 2.75%, nor more than 5.50%. The maximum availability of the Revolving Loan is keyed to the
F-17
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
calculated net collectible value of eligible accounts receivable. Interest rates for the Revolving Loan and Term Loan were as follows:
Interest Rate | ||||||||
Dates |
Term Loan | Revolver | ||||||
July 1, 2009September 21, 2010 |
7.82 | % | 6.25 | % | ||||
September 22, 2010November 14, 2010 |
10.82 | % | 9.25 | % | ||||
November 15, 2010February 15, 2011 |
11.82 | % | 10.25 | % | ||||
February 16, 2011April 14, 2011 |
12.82 | % | 11.25 | % | ||||
April 15, 2011May 15, 2011 |
13.82 | % | 12.25 | % | ||||
May 16, 2011July 15, 2011 |
14.82 | % | 13.25 | % | ||||
July 16, 2011July 28, 2011 |
15.82 | % | 14.25 | % | ||||
July 29, 2011September 30, 2011 |
13.57 | % | 11.625 | % | ||||
October 1, 2011December 31, 2011 |
13.82 | % | 11.875 | % |
Financing costs and expenses related to the Credit Facility of $2,639 are being amortized over the modified life of the Credit Facility. Accumulated amortization and amortization expense was approximately $2,523 and $201, respectively, as of and for the fiscal year ended June 30, 2012 and $2,322 and $1,485 as of and for the fiscal year ended June 30, 2011. The decreased financing cost amortization in the fiscal year ended June 30, 2012 resulted from the change in the termination date of the Credit Facility from April 2015 to September 30, 2011 effective September 27, 2010. The termination date was changed to January 1, 2013 effective July 28, 2012. The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated domestic subsidiaries, including a pledge of all of the equity interests in such subsidiaries (except for Callaway Community Hospital (Callaway) which is a second lien on the real and personal property).
The Credit Facility contains various terms and conditions, including operational and financial restrictions and limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require SunLink to comply with maximum leverage and minimum fixed charge ratios, maximum capital expenditure amounts, collateral value to loan amount and liquidity and cash flow measures, all as defined in the Credit Facility. We believe that the Company should be able to continue in compliance with the revised levels of financial covenants and terms in the Credit Facility through January 2013, but there is no assurance that the Company will be able to do so.
If we fail to remain in compliance with the Credit Facility as modified, we would cease to have a right to draw on the revolving line of credit facility and the lenders would, among other things, be entitled to call a default and demand repayment of the indebtedness outstanding. If SunLink or its applicable subsidiaries experience a material adverse change in their business, assets, financial condition, management or operations, or if the value of the collateral securing the Credit Facility decreases, we may be unable to draw on the credit facility.
Subsequent to June 30, 2012, $15,000 was repaid on the Term Loan consisting of $7,500 of proceeds from the sale of Memorial and $7,500 of proceeds from the Trace RDA Loan. $1,000 was paid on the Revolving Loan subsequent to year end using proceeds from the sale of Memorial. The Term Loan and Revolving Loan balances at September 10, 2012 were $649 and $4,931, respectively.
Additionally, subsequent to June 30, 2012 and prior to the issuance of the financial statements, the Company entered into the Trace RDA Loan for $9,975 and the Trace Working Capital Loan for $1,000 (see Note 3.
F-18
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Subsequent Events). $7,200 of the proceeds were used to repay a portion of the Term Loan. Therefore, in accordance with ASC 470-10, Debt, (ASC 470-10) the Company has classified $7,200 of the Term Loan as a long-term liability as at June 30, 2012.
Callaway RDA Loan On March 26, 2012, SunLink, HealthMont of Missouri, LLC (HOM) and HealthMont LLC (HLLC), the direct parent of HOM, entered into and closed on a $5,000 Loan Agreement with a bank dated as of March 16, 2012 (the Callaway RDA Loan). The loan is guaranteed by the Company and HLLC. HealthMont of Missouri, LLC owns and operates Callaway in Fulton, Missouri. The Loan Agreement consists of two a $4,000 term loan and $1,000 construction loan. The $4,000 term loan was drawn in its entirety on March 26, 2012. As of June 30, 2012, $388 has been drawn on the $1,000 construction loan with the commencement of construction and improvement projects.
The Callaway RDA Loan has a term of 25 years with monthly payments of principal and interest until repaid. The Callaway RDA Loan bears interest at a floating interest rate computed as the prime rate (as published in The Wall Street Journal) plus 2%. The Callaway RDA Loan is collateralized by Callaways real estate and equipment and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. Of the Callaway RDA Loan proceeds, $3,250 was applied as payment against the Companys senior debt under the Term Loan under the Companys Credit Facility. Approximately $1,000 of the Callaway RDA Loan proceeds will be used to finance improvements, including to provide an inpatient geriatric psychiatry unit at Callaway, with the remainder of the Callaway RDA Loan proceeds used for working capital and closing costs. The Callaway RDA Loan contains certain financial covenants with respect to the Borrowers Current Ratio of current assets to current liabilities and Debt Service Coverage, all as defined in the Callaway RDA Loan Agreement, that the Borrower must maintain and that are measured at the end of each fiscal year. The Callaway RDA Loan is guaranteed by HLLC and the Company.
Annual required payments of debt for the next five years and thereafter are as follows:
2013 |
$ | 9,051 | ||
2014 |
476 | |||
2015 |
469 | |||
2016 |
496 | |||
2017 |
515 | |||
2018 and thereafter |
9,631 | |||
|
|
|||
Total |
$ | 20,638 | ||
|
|
The contractual commitments for interest on long-term debt are shown in the following table. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2012.
2013 |
$ | 1,725 | ||
2014 |
620 | |||
2015 |
250 | |||
2016 |
582 | |||
2017 |
552 | |||
2018 and thereafter |
4,125 | |||
|
|
|||
Total |
$ | 7,854 | ||
|
|
F-19
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. |
SUBORDINATED LONG-TERM DEBT |
Subordinated long-term debt consisted of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
Carmichael |
$ | 2,452 | $ | 2,497 | ||||
Less current maturities |
(300 | ) | (300 | ) | ||||
|
|
|
|
|||||
$ | 2,152 | $ | 2,197 | |||||
|
|
|
|
Carmichael Note On April 22, 2008, SunLink Scripts Rx, LLC (formerly known as SunLink Homecare Services, LLC) entered into a $3,000 promissory note agreement with an interest rate of 8% with the former owners of Carmichael as part of the acquisition purchase price (the Carmichael Purchase Note). On April 12, 2011, an amendment to the Carmichael Purchase Note was entered into under which SunLink has the option to issue subordinated promissory notes to the former owners of Carmichael in payment of up to two semi-annual payments of principal and interest due under the Carmichael Purchase Note (the PIK Notes). The PIK Notes bear an interest rate of 8% and are due on April 22, 2015. A PIK Note for $247 was issued on April 22, 2011 for the principal and interest payment that would have been due on April 22, 2011. A PIK Note for $252 was issued on October 22, 2011 for the principal and interest payment that would have been due on October 22, 2011. The Carmichael Purchase Note is payable in semi-annual installments of $150, which began on April 22, 2009, with the remaining balance of the Carmichael Purchase Note and the PIK Notes of $1,702 due April 22, 2015. Interest is payable in arrears semi-annually on the six and twelve-month anniversary of the issuance of the note. The Carmichael Purchase Note is guaranteed by SunLink Health Systems, Inc. The note and the guarantee are subordinate to the Credit Facility.
Under the terms of the Credit Facility (see Note 9 Long-Term Debt and Revolving Line of Credit), if SunLink is in violation of certain terms and conditions of this Facility, the Company cannot make principal payments of the Carmichael Loan without permission of the Credit Facility lender.
Annual required payments of debt for the next five years and thereafter are as follows:
2013 |
$ | 300 | ||
2014 |
300 | |||
2015 |
1,852 | |||
|
|
|||
Total |
$ | 2,452 | ||
|
|
The contractual commitments for interest on the subordinated long-term debt are shown in the following table:
2013 |
$ | 184 | ||
2014 |
160 | |||
2015 |
74 | |||
|
|
|||
Total |
$ | 418 | ||
|
|
11. |
SHAREHOLDERS EQUITY |
Employee and Directors Stock Option Plans On November 7, 2011, the 2011 Director Stock Option Plan was approved by SunLinks shareholders at the Annual Meeting of Shareholders. This plan permits the grant of options to non-employee directors of SunLink for the purchase of up to 300,000 common shares through September
F-20
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
2012. Options for 70,000 shares were granted by November 2011. Options outstanding under the plan were 70,000 at June 30, 2012. Options available for future issuance under the plan were 230,000 at June 30, 2012.
On November 7, 2005, the 2005 Equity Incentive Plan was approved by SunLinks shareholders at the Annual Meeting of Shareholders. This Plan permits the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under the 2001 Plans, which is 30,675, by November 2015. This Plan restricts the number of Incentive Stock Options to 700,000 shares and Restricted Stock Awards to 200,000 shares. The combination of Incentive Stock Options and Restricted Stock Awards cannot exceed 800,000 shares plus the number of unused shares under the 2001 Plans. Each award of Restricted Shares reduces the number of share options to be granted by four option shares for each Restricted Share awarded. No options have been exercised under this Plan. 180,000 options were granted during fiscal 2012. Options outstanding under this Plan were 289,999, 115,999 and 272,999 at June 30, 2012, 2011 and 2010, respectively. Options available for future issuance under the plan were 440,676 at June 30, 2012.
On August 20, 2001, the 2001 Outside Directors Stock Ownership and Stock Option Plan was approved by SunLinks shareholders at the Annual Meeting of Shareholders. This Plan permitted the grant of options to outside directors of SunLink for the purchase of up to 90,000 common shares through March 2006. Options for 90,000 shares were granted by March 2006. Options for 7,500 shares have been exercised under this plan. Options outstanding under this Plan were 37,500, 45,000 and 82,500 at June 30, 2012, 2011 and 2010 respectively. No additional awards may be granted under this Plan.
On February 28, 2001, the 2001 Long-Term Stock Option Plan was approved by the Board of Directors of SunLink. The 2001 Long-Term Stock Option Plan permitted the grant of options to officers and other key employees for the purchase of up to 810,000 common shares through February 2006. Options totaling 299,734 shares under this plan have been exercised. Options outstanding under this Plan were 3,000, 13,250, and 38,125 at June 30, 2012, 2011 and 2010, respectively. No additional awards may be granted under this Plan.
The activity of Companys share options is shown in the following table:
Number of
Shares |
Weighted-
Average Exercise Price |
Range of
Exercise Prices |
||||||||||
Options outstanding July 1, 2009 |
439,799 | $ | 6.20 |
$
$ |
1.50
10.24 |
|
||||||
Granted |
0 | 0.00 | 0.00 | |||||||||
Exercised |
(29,050 | ) | 1.72 | 1.502.50 | ||||||||
Forfeited |
(17,125 | ) | 3.41 | 2.515.48 | ||||||||
|
|
|||||||||||
Options outstanding June 30, 2010 |
393,624 | 5.19 | 1.5010.24 | |||||||||
Granted |
0 | 0.00 | 0.00 | |||||||||
Exercised |
(40,500 | ) | 1.59 | 2.651.50 | ||||||||
Forfeited |
(178,875 | ) | 5.41 | 2.505.86 | ||||||||
|
|
|||||||||||
Options outstanding June 30, 2011 |
174,249 | $ | 5.80 | 2.509.63 | ||||||||
Granted |
250,000 | 1.97 | 1.672.09 | |||||||||
Exercised |
0 | 0.00 | 0.00 | |||||||||
Forfeited |
(23,750 | ) | 2.67 | 2.503.00 | ||||||||
|
|
|||||||||||
Options outstanding June 30, 2012 |
400,499 | $ | 2.62 | $ | 1.67$9.63 | |||||||
|
|
|
|
|
|
|||||||
Options exercisable June 30, 2010 |
348,285 | $ | 5.26 | $ | 1.50$9.63 | |||||||
|
|
|
|
|
|
|||||||
Options exercisable June 30, 2011 |
168,909 | $ | 5.91 | $ | 2.50$9.63 | |||||||
|
|
|
|
|
|
|||||||
Options exercisable June 30, 2012 |
220,498 | $ | 4.75 | $ | 1.67$9.63 | |||||||
|
|
|
|
|
|
F-21
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The weighted-average fair value of each option granted during the year ended June 30, 2012 was $2.09. The fair value of each stock option grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the year ended June 30, 2012: estimated volatility of 76%; risk-free interest rate of 1.34%; dividend yield of 0%; and an expected life of 6 years. The historical volatility is used to calculate the estimated volatility. The expected life of each stock option grant was determined to be the midpoint between the vesting period and the contractual term of the grants. The estimate of the forfeited options in the compensation expense calculation was determined as the weighted-average forfeitures for the last three years. For the years ended June 30, 2012, 2011, and 2010, the Company recognized $92, $6 and $41, respectively, of compensation expense for share options issued. As of June 30, 2012, there was $128 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized during the fiscal years ended June 30, 2013, 2014 and 2015.
Information with respect to stock options outstanding and exercisable at June 30, 2012 is as follows:
Exercise Prices |
Number Outstanding |
Weighted-Average Remaining Contractual Life (in years) |
Number Exercisable |
|||
$ 1.67 |
70,000 | 8.03 | 70,000 | |||
$ 2.09 |
180,000 | 7.16 | 0 | |||
$ 2.51 |
10,000 | 6.23 | 9,999 | |||
$ 2.65 |
3,000 | 0.19 | 3,000 | |||
$ 2.90 |
37,500 | 1.44 | 37,500 | |||
$ 6.55 |
33,000 | 4.88 | 33,000 | |||
$ 8.00 |
33,999 | 5.24 | 33,999 | |||
$ 9.63 |
33,000 | 3.36 | 33,000 | |||
|
|
|||||
400,499 | 6.04 | 220,498 | ||||
|
|
No options were exercised during the year ended June 30, 2012. The total intrinsic value of options exercised during the years ended June 30, 2011 and 2010 were $1, and $16, respectively. As of June 30, 2012 and 2011, the aggregate intrinsic value of options outstanding and options exercisable were $0 and $0, respectively, for both years.
Private Placement of Shares In the first quarter of fiscal 2012, the Companys Board of Directors authorized the private placement before August 31, 2011 of a total of up to 3,800,000 of the Companys common shares at a price equal to the average closing price for the shares over the prior ten trading days (on which the Companys shares traded) with a minimum placement of $2,500.
On July 28, 2011, SunLink announced the sale of approximately 1,329,000 common shares at approximately $1.90 per share. Such shares were sold to certain of the Companys officers and directors and/or their affiliates. The net proceeds of the private placement of approximately $2,500 were used, together with the Companys operating funds, to make an $8,000 pre-payment on the Credit Facility Term Loan. A special committee of the Companys Board of Directors comprised of non-participating disinterested directors evaluated the private placement transaction and obtained an opinion of an outside advisor selected by the special committee that the price and terms of the private placement were fair from a financial point of view to the Company. No additional shares were sold pursuant to the private placement.
Shareholder Rights Plan On February 8, 2004, the Board of Directors of the Company declared a dividend of one Series A Voting Preferred Purchase Price Right (a Right) for each outstanding common share
F-22
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
of the Company to record owners of common shares at the close of business on February 10, 2004. Shares issued subsequent to such date are issued with a Right. The Board of Directors declared these Rights to protect shareholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combinations approved by the Board of Directors. The Rights expire on February 8, 2014 unless the Company redeems them at an earlier date. The Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right, at any time prior to a public announcement that a person has become an Acquiring Person.
Accumulated Other Comprehensive Income (Loss) Information with respect to the balances of each classification within accumulated other comprehensive loss is as follows:
Foreign
Currency Translation Adjustment |
Minimum
Pension Liability Adjustment |
Accumluated
Other Comprehensive Loss |
||||||||||
June 30, 2009 |
$ | (46 | ) | $ | (291 | ) | $ | (337 | ) | |||
Current period change |
46 | (10 | ) | 36 | ||||||||
|
|
|
|
|
|
|||||||
June 30, 2010 |
0 | (301 | ) | (301 | ) | |||||||
Current period change |
0 | 23 | 23 | |||||||||
|
|
|
|
|
|
|||||||
June 30, 2011 |
0 | (278 | ) | (278 | ) | |||||||
Current period change |
0 | (219 | ) | (219 | ) | |||||||
|
|
|
|
|
|
|||||||
June 30, 2012 |
$ | 0 | $ | (497 | ) | $ | (497 | ) | ||||
|
|
|
|
|
|
12. |
INCOME TAXES |
The provision (benefit) for income taxes on continuing operations are as follows:
Year ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Current |
$ | 242 | $ | (834 | ) | $ | 917 | |||||
Deferred |
616 | (7,775 | ) | (1,495 | ) | |||||||
|
|
|
|
|
|
|||||||
Total income tax expense (benefit) |
$ | 858 | $ | (8,609 | ) | $ | (578 | ) | ||||
|
|
|
|
|
|
Net deferred income tax assets recorded in the consolidated balance sheets are as follows:
June 30, | ||||||||
2012 | 2011 | |||||||
Net operating loss carryforward |
$ | 5,624 | $ | 3,004 | ||||
Depreciation expense |
(3,385 | ) | (3,954 | ) | ||||
Allowances for receivables |
3,217 | 3,727 | ||||||
EHR Deferred gain |
13 | 3,260 | ||||||
Accrued expenses |
2,675 | 2,904 | ||||||
Intangible assets |
4,273 | 4,879 | ||||||
Pension liabilities |
208 | 42 | ||||||
Other |
485 | (152 | ) | |||||
|
|
|
|
|||||
13,110 | 13,710 | |||||||
Less valuation allowance |
(2,045 | ) | (2,078 | ) | ||||
|
|
|
|
|||||
Net deferred income tax assets |
$ | 11,065 | $ | 11,632 | ||||
|
|
|
|
F-23
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The differences between income taxes at the Federal statutory rate and the effective tax rate were as follows:
Year ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Income tax at Federal statutory rate |
$ | 514 | $ | (8,212 | ) | $ | (391 | ) | ||||
Changes in valuation allowancecontinuing operations |
(33 | ) | 588 | (86 | ) | |||||||
U.S. state income taxes, net of federal benefit |
(9 | ) | (1,046 | ) | (319 | ) | ||||||
Share option expense |
31 | 2 | 13 | |||||||||
Amortization |
316 | 9 | 9 | |||||||||
Other |
39 | 50 | 196 | |||||||||
|
|
|
|
|
|
|||||||
Total income tax expense (benefit)continuing operations |
$ | 858 | $ | (8,609 | ) | $ | (578 | ) | ||||
|
|
|
|
|
|
The Company provided a $2,045 deferred tax valuation allowance as of June 30, 2012 so that the net deferred income tax assets were $11,065 as of June 30, 2012. Based upon managements assessment, the Company determined that it was more likely than not that a portion of its deferred tax asset would not be recovered. The increase in the valuation allowance during the fiscal year ended June 30, 2012 resulted from reserving for certain state net operating loss carryforwards that were not reserved for in prior periods. It is more likely than not that these net operating loss carryforwards will not be realized in future years. The Company provided a $2,078 deferred tax valuation allowance as of June 30, 2011 so that the net deferred tax assets were $11,632 as June 30, 2011. The net operating loss carryforwards expire in 2023.
The Company accounts for uncertainty in income taxes for a change in judgment related to prior years tax positions in the quarter of such change. The company classifies interest and penalties related to unrecognized tax benefits as part of its provision for income taxes. Accordingly, included in the liability for unrecognized tax benefits was a liability of $19 as of June 30, 2012.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits, included interest and penalties from July 1, 2009 through June 30, 2012 is presented below:
Balance at July 1, 2009 |
$ | 66 | ||
Additions based on tax positions related to current year |
35 | |||
Additions for tax positions of prior years |
0 | |||
Reductions for tax positions of prior years |
(30 | ) | ||
Settlements |
0 | |||
|
|
|||
Balance at June 30, 2010 |
71 | |||
Additions based on tax positions related to current year |
0 | |||
Additions for tax positions of prior years |
0 | |||
Reductions for tax positions of prior years |
(34 | ) | ||
Settlements |
0 | |||
|
|
|||
Balance at June 30, 2011 |
37 | |||
Additions based on tax positions related to current year |
0 | |||
Additions for tax positions of prior years |
0 | |||
Reductions for tax positions of prior years |
(18 | ) | ||
Settlements |
0 | |||
|
|
|||
Balance at June 30, 2012 |
$ | 19 | ||
|
|
F-24
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. |
EMPLOYEE BENEFITS |
Defined Benefit Plans No defined benefit plan is maintained for employees of either the Healthcare Facilities Segment or the Specialty Pharmacy Segment. Prior to 1997, SunLink had maintained defined benefit retirement plans covering substantially all of its domestic employees. Effective February 28, 1997, SunLink amended its domestic retirement plan to freeze participant benefits and close the plan to new participants. Benefits under the frozen plan are based on years of service and level of earnings. SunLink funds the frozen plan, which is noncontributory, at a rate that meets or exceeds the minimum amounts required by the Employee Retirement Income Security Act of 1974.
Since the sale of SunLinks life sciences and engineering segment businesses in the fiscal year ended March 31, 1999, net pension expense has been classified as an expense of discontinued operations.
At June 30, 2012, the plans assets were invested 80% in cash and short term investments, 10% in equity investments and 10% in fixed income investments. The plans current investment policy of primarily investing in cash and short term investments is in response to the poor returns on investment of the past 5 years in the equity markets, the returns available in the fixed income markets and the possible need for immediate liquidity as participants retire or withdraw from the plan. The expected return on investment of 4% is based upon the plans historical return on assets. The plan expects to pay $65, $80, $68, $72, and $75 in pension benefits in the years ending June 30, 2013 though 2017, respectively. The plan expects to pay $78 in pension benefits for the years June 30, 2018 through 2022, in the aggregate. This assumes the plan participants elect to take monthly pension benefits as opposed to a lump sum payout when they reach age 65. The Company made no contributions to the plan for the year ended June 30, 2012.
The components of net pension expense for all plans (comprised solely of one domestic plan) were as follows:
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Service cost |
$ | 0 | $ | 0 | $ | 0 | ||||||
Interest cost |
74 | 73 | 72 | |||||||||
Expected return on assets |
(41 | ) | (43 | ) | (45 | ) | ||||||
Amortization of prior service cost |
55 | 53 | 44 | |||||||||
|
|
|
|
|
|
|||||||
Net pension expense |
$ | 88 | $ | 83 | $ | 71 | ||||||
|
|
|
|
|
|
|||||||
Weighted-average assumptions: |
||||||||||||
Discount rate |
6.50 | % | 6.50 | % | 6.50 | % | ||||||
Expected return on plan assets |
4.00 | % | 4.00 | % | 4.00 | % | ||||||
Rate of compensation increase |
0.00 | % | 0.00 | % | 0.00 | % |
F-25
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Summary information for the plans (comprised solely of one domestic plan) is as follows:
2012 | 2011 | |||||||
Change in Benefit Obligation |
||||||||
Benefit obligation at beginning of year |
$ | 1,157 | $ | 1,159 | ||||
Interest cost |
73 | 74 | ||||||
Actuarial (gain) loss |
350 | (13 | ) | |||||
Benefits paid |
(44 | ) | (63 | ) | ||||
|
|
|
|
|||||
Benefit obligation at end of year |
$ | 1,536 | $ | 1,157 | ||||
|
|
|
|
|||||
Change in Plan Assets |
||||||||
Fair value of plan asset at beginning of year |
$ | 1,045 | $ | 1,093 | ||||
Actual return on plan assets |
(16 | ) | 15 | |||||
Benefits paid |
(44 | ) | (63 | ) | ||||
|
|
|
|
|||||
Fair value of plan asset at end of year |
$ | 985 | $ | 1,045 | ||||
|
|
|
|
|||||
Funded status of the plans |
(551 | ) | (111 | ) | ||||
Unrecognized actuarial loss |
798 | 446 | ||||||
|
|
|
|
|||||
Prepaid benefit cost |
$ | 247 | $ | 335 | ||||
|
|
|
|
|||||
Amounts Recognized in Consolidated Balance Sheets |
||||||||
Prepaid benefit cost |
(551 | ) | (111 | ) | ||||
Accumulated other comprehensive income* |
798 | 446 | ||||||
|
|
|
|
|||||
Net amount recognized |
$ | 247 | $ | 335 | ||||
|
|
|
|
* |
Accumulated other comprehensive income represents pretax minimum pension liability adjustments. |
Defined Contribution Plan SunLink has a defined contribution plan pursuant to IRS Section 401(k) covering substantially all domestic employees. SunLink matches a specified percentage of the employees contribution as determined periodically by its management. No match was provided for the fiscal years ended June 30, 2012, 2011 and 2010. Plan expenses for the defined contribution plan were $0 for the years ended June 30, 2012, 2011 and 2010, respectively.
14. |
COMMITMENTS AND CONTINGENCIES |
Leases The Company leases various land, buildings, and equipment under operating lease obligations having noncancelable terms ranging from one to 14 years. Rent expense was $2,775, $2,903, and $2,691, for the years ended June 30, 2012, 2011 and 2010, respectively. Minimum lease commitments as of June 30, 2012 are as follows:
Fiscal year ending June 30: |
||||
2013 |
$ | 3,031 | ||
2014 |
905 | |||
2015 |
641 | |||
2016 |
477 | |||
2017 |
300 | |||
2018 and therafter |
467 | |||
|
|
|||
$ | 5,821 | |||
|
|
F-26
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Physician Guarantees At June 30, 2012, SunLink had guarantee agreements with three physicians. A physician with whom a guarantee agreement is made generally agrees to maintain his or her practice within a hospital geographic area for a specific period (normally three years) or be liable to repay all or a portion of the guarantee received. The physicians liability for any guarantee repayment due to non-compliance with the provisions of a guarantee agreement generally is collateralized by the physicians patient accounts receivable and/or a promissory note from the physician. Included in the Companys consolidated balance sheet at June 30, 2012 is a liability of $197 for one physician guarantee. SunLink expensed $375, $278, and $458, for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Noncancelable commitments under these contracts as of June 30, 2012 are as follows:
Fiscal year ending June 30: |
||||
2013 |
$ | 91 | ||
2014 |
91 | |||
2015 |
15 | |||
|
|
|||
$ | 197 | |||
|
|
Litigation On December 7, 2007, Southern Health Corporation of Ellijay, Inc. (SHC-Ellijay) filed a Complaint against James P. Garrett and Roberta Mundy, both individually and as Fiduciary of the Estate of Randy Mundy (collectively, Defendants), seeking specific performance of an Option Agreement (the Option Agreement) dated April 17, 2007, between SHC-Ellijay, Mr. Garrett, and Ms. Mundy as Executrix of the Estate of Randy Mundy for the sale of approximately 24.74 acres of real property located in Gilmer County, Georgia, and recovery of SHC-Ellijays damages suffered as a result of Defendants failure to close the transaction in accordance with the Option Agreement. SHC-Ellijay also stated alternative claims for breach of the Option Agreement and fraud, along with claims to recover attorneys fees and punitive damages.
In January 2008, Defendants filed motions to strike, motions to dismiss, answers, affirmative defenses, and a counterclaim against SHC-Ellijay. On March 3, 2009, SHC-Ellijay filed a First Amended and Restated Complaint for Damages, which effectively dropped the cause of action for specific performance of the Option Agreement. On May 7, 2009, Mr. Garrett and Ms. Mundy served a motion for summary judgment on all counts and causes of action stated in the First Amended Complaint. The court has postponed consideration of the defendants motion for summary judgment and SHC-Ellijays response thereto until after a discovery dispute between the parties was resolved. After further motions and argument, the parties eventually completed discovery.
On May 12, 2011, SHC-Ellijay filed a motion for partial summary judgment as to Defendants liability for breaches of contract and for summary judgment denying Defendants counterclaims. On June 10, 2011, Defendants filed a response in opposition to SHC-Ellijays motion and a cross motion for summary judgment. On July 27, 2011, SHC-Ellijay filed a reply brief in further support of its motion for partial summary judgment on the complaint and full summary judgment on the Defendants counterclaims and brief in opposition to Defendants cross motion for summary judgment.
On April 11, 2012, the Court entered an Order granting SHC-Ellijays motion for partial summary judgment and denying Defendants motions for summary judgment. On or about April 23, 2012, Defendants filed a notice of appeal to the Georgia Court of Appeals. Defendants filed their Brief of Appellants on July 30, 2012. SHC-Ellijay filed its Brief of Appellee on August 21, 2012. The case remains pending before the Georgia Court of Appeals.
SunLink denies that it has any liability to Defendants and intends to vigorously defend the claims asserted against SunLink by the Defendants complaint and to vigorously pursue its claims against the Defendants. While
F-27
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the ultimate outcome and materiality of the litigation cannot be determined, in managements opinion the litigation will not have a material adverse effect on SunLinks financial condition or results of operations.
SunLink is a party to claims and litigation incidental to its business, for which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.
15. |
RELATED PARTIES |
A director of the Company and the Companys secretary are members of two different law firms, each of which provides services to SunLink. We have paid an aggregate of $1,092, $896, and $596 to these law firms in the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Included in the Companys consolidated balance sheet at June 30, 2012 and 2011 is $644 and $205, respectively, of amounts payable to these law firms.
16. |
FINANCIAL INFORMATION BY SEGMENTS |
Under ASC Topic No. 280, Segment Reporting, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two reportable operating segments are Healthcare Facilities and Specialty Pharmacy.
We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the fiscal years ended June 30, 2012, 2011 and 2010 is as follows:
2012 |
Healthcare
Facilities |
Specialty
Pharmacy |
Corporate
and Other |
Total | ||||||||||||
Net Revenues from external customers |
$ | 108,575 | $ | 38,099 | $ | 0 | $ | 146,674 | ||||||||
Operating profit (loss) |
10,831 | 457 | (5,380 | ) | 5,908 | |||||||||||
Depreciation and amortization |
3,316 | 815 | 546 | 4,677 | ||||||||||||
Assets |
51,487 | 11,652 | 16,033 | 79,172 | ||||||||||||
Expenditures for property, plant and equipment |
1,047 | 455 | 87 | 1,589 | ||||||||||||
2011 |
||||||||||||||||
Net Revenues from external customers |
$ | 114,460 | $ | 39,920 | $ | 0 | $ | 154,380 | ||||||||
Operating profit (loss) |
3,362 | (14,463 | ) | (5,496 | ) | (16,597 | ) | |||||||||
Depreciation and amortization |
3,675 | 1,562 | 460 | 5,697 | ||||||||||||
Assets |
56,217 | 11,525 | 24,088 | 91,830 | ||||||||||||
Expenditures for property, plant and equipment |
801 | 751 | 794 | 2,347 | ||||||||||||
2010 |
||||||||||||||||
Net Revenues from external customers |
$ | 123,360 | $ | 42,962 | $ | 0 | $ | 166,322 | ||||||||
Operating profit (loss) |
8,395 | (421 | ) | (5,517 | ) | 2,457 | ||||||||||
Depreciation and amortization |
4,040 | 1,636 | 448 | 6,124 | ||||||||||||
Assets |
60,419 | 25,195 | 12,876 | 98,490 | ||||||||||||
Expenditures for property, plant and equipment |
1,441 | 718 | 150 | 2,309 |
F-28
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
17. EARNINGS PER SHARE
(Share |
Amounts in Thousands) |
Years Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | 2010 | ||||||||||||||||||||||
Per Share | Per Share | Per Share | ||||||||||||||||||||||
Amount | Amount | Amount | Amount | Amount | Amount | |||||||||||||||||||
Earnings (loss) from continuing operations |
$ | 652 | $ | (15,416 | ) | $ | (422 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Basic: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.07 | 8,094 | $ | (1.90 | ) | 8,052 | $ | (0.05 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.07 | 8,094 | $ | (1.90 | ) | 8,052 | $ | (0.05 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Earnings (loss) from discontinued operations |
$ | 429 | $ | (687 | ) | $ | 524 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Basic: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.05 | 8,094 | $ | (0.08 | ) | 8,052 | $ | 0.07 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.05 | 8,094 | $ | (0.08 | ) | 8,052 | $ | 0.07 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net Earnings (loss) |
$ | 1,081 | $ | (16,103 | ) | $ | 102 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Basic: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.12 | 8,094 | $ | (1.99 | ) | 8,052 | $ | 0.01 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Diluted: |
||||||||||||||||||||||||
Weighted-average shares outstanding |
9,350 | $ | 0.12 | 8,094 | $ | (1.99 | ) | 8,052 | $ | 0.01 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Weighted-average number of shares outstandingbasic |
9,350 | 8,094 | 8,052 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Effect of dilutive director, employee and guarantor options and outstanding common share warrants |
0 | 0 | 0 | |||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Weighted-average number of shares outstandingdiluted |
9,350 | 8,094 | 8,052 | |||||||||||||||||||||
|
|
|
|
|
|
Share options of 0, 174 and 321 for the years ended June 30, 2012, 2011 and 2010, respectively, are not included in the computation of diluted earnings per share because their effect would be antidilutive.
F-29
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(All amounts in thousands, except per share amount)
The following selected quarterly data for the years ended June 30, 2012 and 2011, respectively, are unaudited.
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
|||||||||||||||
NET REVENUE |
Year Ended June 30, 2012 | $ | 34,635 | $ | 39,484 | $ | 37,038 | $ | 35,517 | |||||||||
Year Ended June 30, 2011 | 34,667 | 42,376 | 40,541 | 36,796 | ||||||||||||||
EARNINGS (LOSS) FROM |
||||||||||||||||||
CONTINUING OPERATIONS |
Year Ended June 30, 2012 | 4,213 | (1,217 | ) | (1,093 | ) | (1,251 | ) | ||||||||||
Year Ended June 30, 2011 | (10,708 | ) | (568 | ) | (2,089 | ) | (2,051 | ) | ||||||||||
NET EARNINGS (LOSS) |
Year Ended June 30, 2012 | 5,114 | (1,544 | ) | (934 | ) | (1,555 | ) | ||||||||||
Year Ended June 30, 2011 | (11,255 | ) | (314 | ) | (1,766 | ) | (2,768 | ) | ||||||||||
EARNINGS (LOSS) PER SHARE: |
||||||||||||||||||
Continuing operations |
||||||||||||||||||
Basic |
Year Ended June 30, 2012 | 0.45 | (0.13 | ) | (0.12 | ) | (0.15 | ) | ||||||||||
Year Ended June 30, 2011 | (1.32 | ) | (0.07 | ) | (0.26 | ) | (0.25 | ) | ||||||||||
Diluted |
Year Ended June 30, 2012 | 0.45 | (0.13 | ) | (0.12 | ) | (0.15 | ) | ||||||||||
Year Ended June 30, 2011 | (1.32 | ) | (0.07 | ) | (0.26 | ) | (0.25 | ) | ||||||||||
NET EARNINGS (LOSS): |
||||||||||||||||||
Basic |
Year Ended June 30, 2012 | 0.54 | (0.16 | ) | (0.10 | ) | (0.18 | ) | ||||||||||
Year Ended June 30, 2011 | (1.39 | ) | (0.04 | ) | (0.22 | ) | (0.34 | ) | ||||||||||
Diluted |
Year Ended June 30, 2012 | 0.54 | (0.16 | ) | (0.10 | ) | (0.18 | ) | ||||||||||
Year Ended June 30, 2011 | $ | (1.39 | ) | $ | (0.04 | ) | $ | (0.22 | ) | $ | (0.34 | ) | ||||||
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||||||||
Basic |
Year Ended June 30, 2012 | 9,448 | 9,448 | 9,448 | 8,581 | |||||||||||||
Year Ended June 30, 2011 | 8,119 | 8,095 | 8,082 | 8,081 | ||||||||||||||
Diluted |
Year Ended June 30, 2012 | 9,448 | 9,448 | 9,448 | 8,581 | |||||||||||||
Year Ended June 30, 2011 | 8,119 | 8,095 | 8,082 | 8,081 |
F-30
Exhibit 10.26
MORTGAGE LOAN AGREEMENT
by and between
SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.,
a Georgia corporation (Borrower)
and
STILLWATER NATIONAL BANK AND TRUST COMPANY (Lender)
TABLE OF CONTENTS
8.3 Boiler and Machinery Insurance |
11 | |||||
8.4 Builders Risk Insurance |
11 | |||||
8.5 Business Interruption Insurance |
12 | |||||
8.6 Liability Insurance |
12 | |||||
8.7 Statutory Employees Insurance |
12 | |||||
8.8 Fidelity Bonds |
13 | |||||
8.9 Medical Malpractice Insurance |
13 | |||||
8.10 Documentation |
13 | |||||
8.11 Policy Requirements |
13 | |||||
8.12 Blanket Coverage |
14 | |||||
8.13 Protection of Lenders Interest |
14 | |||||
8.14 Lenders Rights; No Liability |
15 | |||||
9. |
ACCOUNT COLLECTIONS | 15 | ||||
10. |
COVENANTS | 15 | ||||
10.1 Performance of Obligations |
16 | |||||
10.2 Information |
16 | |||||
10.3 Guarantor Financial Statements |
16 | |||||
10.4 Tax Returns |
17 | |||||
10.5 Accounts Receivable Reports |
17 | |||||
10.6 Financial Covenants |
18 | |||||
10.7 Financial Ratios Compliance Certificate |
19 | |||||
10.8 Litigation |
19 | |||||
10.9 Construction Standards |
19 | |||||
10.10 No Liens |
20 | |||||
10.11 Use of Loan Proceeds |
20 | |||||
10.12 Estoppel Certificates |
20 | |||||
10.13 Payment of Taxes |
20 | |||||
10.14 Books and Records |
20 | |||||
10.15 Lenders Access |
20 | |||||
10.16 Post Completion Survey |
21 | |||||
10.17 No Merger |
21 | |||||
10.18 No Sale |
22 | |||||
10.19 Business Restrictions |
22 | |||||
10.20 Subcontractors |
22 | |||||
10.21 Other Information |
22 | |||||
10.22 Inspections |
22 | |||||
10.23 Contingent Liabilities |
22 | |||||
10.24 Other Agreements |
23 | |||||
10.25 Additional Documents |
23 | |||||
10.26 Other Indebtedness |
23 | |||||
10.27 Bank Accounts |
23 | |||||
10.28 Management Fees |
23 | |||||
10.29 Intercompany Loans; Dividends |
23 | |||||
10.30 Equal Employment Opportunity |
24 | |||||
10.31 USDA Annual Fee Escrow |
24 | |||||
10.32 Environmental Laws |
24 | |||||
10.33 Environmental Indemnification |
25 | |||||
10.34 Building Laws Indemnification |
25 | |||||
10.35 SNDAs |
25 | |||||
10.36 Maintenance and Covenant against Waste; MEP Inspection |
25 | |||||
10.37 USDA Covenants |
25 | |||||
11. |
ADMINISTRATION OF CONSTRUCTION ESCROW ACCOUNT | 26 | ||||
11.1 Purpose |
26 | |||||
11.2 Conditions Subsequent to Escrow Funding |
26 | |||||
11.3 Requests for Draws |
28 | |||||
11.4 Inspection |
29 |
ii
11.5 Disbursements |
30 | |||||
11.6 Retainage |
30 | |||||
11.7 Termination of Drawing Rights |
30 | |||||
12. |
ANTI-MONEY LAUNDERING AND INTERNATIONAL TRADE CONTROLS | 31 | ||||
12.1 Compliance with International Trade Control Laws and OFAC Regulations |
31 | |||||
12.2 Borrowers Funds |
31 | |||||
13. |
DEFAULT | 32 | ||||
13.1 Nonpayment of Notes |
32 | |||||
13.2 Working Capital Loan Agreement Default |
32 | |||||
13.3 Chatham Credit Agreement Default |
33 | |||||
13.4 Other Nonpayment |
33 | |||||
13.5 Breach of Covenants |
33 | |||||
13.6 Creation of Liens |
33 | |||||
13.7 Change of Ownership |
33 | |||||
13.8 Liquidation or Disposition of Assets |
33 | |||||
13.9 Judgment |
34 | |||||
13.10 Casualty Loss; Condemnation |
34 | |||||
13.11 Variance from Plans and Specifications |
34 | |||||
13.12 Work Stoppage |
34 | |||||
13.13 Bankruptcy |
34 | |||||
13.14 Termination of Existence |
34 | |||||
13.15 Governmental Requirements |
34 | |||||
13.16 Representations |
35 | |||||
13.17 Loan Documents |
35 | |||||
13.18 Revocation of Authorization |
35 | |||||
13.19 Loss of Licenses |
35 | |||||
13.20 Certificate of Completion |
35 | |||||
14. |
REMEDIES | 35 | ||||
14.1 Acceleration of Note |
35 | |||||
14.2 Selective Enforcement |
36 | |||||
14.3 Completion by Lender |
36 | |||||
14.4 Cumulative Remedies |
37 | |||||
14.5 Deposits; Setoff |
37 | |||||
14.6 Appointment of Receiver |
37 | |||||
15. |
MISCELLANEOUS | 37 | ||||
15.1 Origination |
37 | |||||
15.2 Expenses |
37 | |||||
15.3 Notices |
38 | |||||
15.4 Amendment and Waiver |
39 | |||||
15.5 Non-Waiver; Cumulative Remedies |
39 | |||||
15.6 Applicable Law |
39 | |||||
15.7 Descriptive Headings |
39 | |||||
15.8 Integrated Agreement |
39 | |||||
15.9 Time of Essence |
40 | |||||
15.10 Binding Effect |
40 | |||||
15.11 Third Party Beneficiary |
40 | |||||
15.12 Right to Defend |
40 | |||||
15.13 Participation |
40 | |||||
15.14 Disclosure of Information; Confidentiality |
40 | |||||
15.15 Accuracy of Information |
41 | |||||
15.16 Maximum Legal Rate of Interest |
41 | |||||
15.17 No Responsibility of Lender |
41 | |||||
15.18 No Leasing or Drilling |
42 | |||||
15.19 Notice of Title Protection |
42 | |||||
15.20 Jurisdiction and Venue |
42 | |||||
15.21 Counterparts |
42 |
iii
15.22 New Loan |
42 | |||||
15.23 USDA Consent |
43 | |||||
15.24 Defined Terms |
43 |
iv
MORTGAGE LOAN AGREEMENT
THIS LOAN AGREEMENT (the Loan Agreement) is entered into effective this 5th day of July, 2012 (the Effective Date), by and between SOUTHERN HEALTH CORPORATION OF HOUSTON, INC., a Georgia corporation (Borrower) and STILLWATER NATIONAL BANK AND TRUST COMPANY (Lender).
RECITALS
WHEREAS, Borrower has requested that Lender extend certain credit and related financial accommodations including a loan of $9,975,000 to Borrower in connection with the refinancing of, and the making of certain capital improvements to, Borrowers real estate and related improvements in Houston, Mississippi (the Mortgage Loan);
WHEREAS, Lender has agreed to accommodate the request from Borrower for the loan subject to the provisions of this Loan Agreement including the receipt of certain guaranties; and
WHEREAS, (i) SunLink Healthcare, LLC, a Georgia limited liability company (Healthcare), and SunLink Health Systems, Inc., an Ohio corporation (SunLink) are each willing to separately guarantee 100% of the indebtedness and obligations of Borrower to Lender pursuant to their respective guaranties of even date herewith and (ii) the United States Department of Agriculture is willing to guarantee 70% of the Mortgage Loan pursuant to a USDA 70% Guaranty Agreement; and
WHEREAS, concurrently herewith Lender is also extending certain credit to Borrower pursuant to a separate Working Capital Loan Agreement for a loan of up to one million dollars for working capital and similar general corporate purposes dated as of an even date herewith with such loan evidenced by a revolving promissory note;
NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which the parties hereto acknowledge, Borrower and Lender hereby agree as follows:
1. LENDING AGREEMENT . Subject to the terms and conditions hereinafter set forth, Lender agrees to lend to Borrower, and Borrower agrees to borrow from Lender the sum of NINE MILLION NINE HUNDRED SEVENTY-FIVE THOUSAND AND NO/100THS DOLLARS ($9,975,000.00) (the Loan Commitment), to be used by Borrower solely for the purposes of (a) refinancing Borrowers existing real estate mortgages and/or deeds of trust; (b) allowing Borrower to fund EIGHT HUNDRED FIFTY THOUSAND DOLLARS AND NO 100THS DOLLARS ($850,000.00) to the Construction Escrow Account (defined in Section 4.3) to finance a portion of the cost of constructing a medical office building (MOB) as reflected in the Construction Budget (defined in Section 11.2.5), all in connection with two parcels of real property and improvements located in Houston, Chickasaw County, Mississippi described at Exhibit A hereto (the Property); and (c) paying all fees and expenses required to be paid by Borrower hereunder.
2. BORROWERS NOTE . Borrower will execute and deliver to Lender a term promissory note of even date herewith in form and substance and payable on terms approved by Lender (the Mortgage Note) having the following terms:
2.1. |
Amount . The principal face amount will be NINE MILLION NINE HUNDRED SEVENTY-FIVE THOUSAND AND NO/100THS DOLLARS ($9,975,000.00). |
2.2. |
Interest . The Mortgage Note will bear interest at the interest rate equal to the greater of (a) six percent (6.0%) per annum; or (b) the Prime Rate plus one and one half percent (1.5%) per annum, which rate will be prospectively adjusted on June 30, 2012 and on the last day of every third month thereafter to reflect any change in the Prime Rate as in effect on such date (the Interest Rate). Prime Rate means the Prime Rate as published in the Money Rates Section of the Wall Street Journal , which rate is not necessarily the lowest rate of interest charged by Lender. All interest on the Mortgage Note shall be calculated for the actual number of days elapsed at a per diem charge based on a year consisting of 360 days. |
2.3. |
Payments . |
2.3.1. |
Regular Payments . Commencing August 1, 2012 and on the 1st day of each month thereafter, Borrower will make equal monthly payments in an amount sufficient to fully amortize principal and interest over the remaining term of the Mortgage Note at the Interest Rate. The payment amount will be adjusted each time the Interest Rate is adjusted to reflect the change in the Interest Rate. |
2.3.2. |
Additional Payments . The first $500,000.00 of the incentive payments received by Borrower after the Effective Date pursuant to the Health Information Technology for Economic and Clinical Act of 2009 (the EHR Payments), the terms and conditions of which are more particularly described at 42 U.S.C. § 1395ww(n), 42 C.F.R. § 495.104, et seq ., 75 F ED . R EG . 44314, will be paid by Borrower to Lender within five (5) days of Borrowers receipt thereof to be applied to the outstanding balance owing under the Mortgage Note. Unless a Default shall have occurred and then be continuing, Borrower will be entitled to use EHR Payments in excess of $500,000.00 in Borrowers sole and absolute discretion. If a Default shall have occurred and then be continuing, all EHR Payments after and during such Default will be paid by Borrower to Lender within five (5) days after Borrowers receipt thereof to be applied by Lender to reduce the outstanding principal balance of the Mortgage Note. |
2.3.3. |
Prepayment Premium . Borrower will have the right to prepay the Mortgage Note in whole or in part at any time and from time to time with interest accrued to the date of prepayment on the amount prepaid, conditioned upon ten (10) days prior written notice to Lender of Borrowers intent to prepay |
2
the Mortgage Note accompanied by delivery of the Prepayment Premium (defined below) to Lender. The Prepayment Premium shall be equal to five percent (5.0%) of the amount of the outstanding principal balance of the Mortgage Note being repaid as of the date of the prepayment if such prepayment date is on or before the fifth anniversary date of the Mortgage Note. No Prepayment Premium shall be due for prepayment made after the fifth anniversary of the Mortgage Note or prepayment made from EHR Payments. |
2.4. |
Maturity . The entire unpaid principal balance plus all accrued interest owing on the Mortgage Note shall be due and payable on July 5, 2027 (the Maturity Date). |
2.5. |
Advances . The Loan Commitment will be fully funded under the Mortgage Note upon the satisfaction of the conditions set forth in Section 7 below. |
3. RECOURSE . The Loan Commitment will be full recourse to Borrower under the Mortgage Note, full recourse to SunLink and Healthcare under their guaranties, and limited recourse to USDA under its guaranty.
4. COLLATERAL SECURITY . The performance of all covenants and agreements contained in this Loan Agreement and in the other documents executed or delivered as a part of this transaction and the payment of the Mortgage Note and all renewals, amendments and modifications thereof, all interest thereon and expenses of collection thereof shall be secured by the following:
4.1. |
Deed of Trust . Borrower shall grant Lender a first priority lien covering the Property together with all buildings, fixtures and improvements now or hereafter located thereon to be evidenced by a deed of trust in form and substance approved by Lender (the Deed of Trust). |
4.2. |
Assignment of Rents . Borrower shall grant Lender a first priority security interest in all of Borrowers leases and rents with respect to the Property pursuant to the terms of an assignment of leases and rents covering the Property in form and substance approved by Lender (the Assignment of Rents). |
4.3. |
Security Interest . Borrower shall grant Lender (i) a first priority security interest covering all of Borrowers medical equipment, furniture, hospital beds, kitchen equipment and supplies, computer equipment, computer hardware, computer software, computer software licenses, general intangibles, and all other tangible personal property, whether now owned or hereafter acquired, and all proceeds, products, rents, profits and income from the sale thereof (the Equipment); (ii) a first priority security interest covering the Borrowers Account No. xxxxxxx (the Construction Escrow Account), and Account No. xxxxxxx, a restricted account for the USDA origination and guaranty |
3
fee (the USDA Fee Account), both maintained by Borrower with Lender (together, the Mortgage Accounts), (iii) a second priority security interest in all of Borrowers other accounts and deposit accounts with Lender, including but not limited to Account No. xxxxxxx (the Medicare Account) and Account No. xxxxxxx (the Operating Account), both maintained by the Borrower with the Lender (all such accounts collectively, the Deposit Accounts), (iv) a second priority security interest in Borrowers goods, chattels, revenue, income, certificates of title, medical supplies, and equipment (collectively, the Goods), and (v) a second priority security interest in Borrowers accounts receivable, government and non-government health care accounts receivable, including but not limited to health-care-insurance receivables, contract rights and inventory whether now owned or hereafter acquired, and all proceeds, products, rents, profits, and income therefrom (collectively, the Receivables). The Equipment, the Mortgage Accounts, the Deposit Accounts, the Goods and the Receivables are collectively referred to herein as the Borrowers Personal Property. The security interests granted shall be evidenced by one or more security agreements in form and substance approved by Lender (the Security Agreement). The lien covering the Deposit Accounts, the Goods and the Receivables will be subordinate only to the lien granted by Borrower to Lender in the same collateral to secure the Working Capital Note, but will be released by Lender upon satisfaction of the following conditions: |
4.3.1. |
Lenders commitment under the Working Capital Loan Agreement is terminated, and |
4.3.2. |
Indebtedness to the Lender under the Working Capital Loan Agreement is paid in full, provided that, in the event such indebtedness is refinanced with another lender, Lender shall have consented, no such consent to be unreasonably withheld, delayed or conditioned, and entered into an appropriate, commercially reasonable intercreditor agreement with the replacement lender, which replacement lender would have a senior lien on the Deposit Accounts, the Goods and the Receivables; and |
4.3.3. |
No Default under this Loan Agreement shall have occurred and then be continuing. |
4.4. |
Stock Pledge Agreement . In support of the unlimited guaranty to be delivered by Healthcare, Healthcare shall pledge 100% of the stock and ownership interests in Borrower to Lender, to be evidenced by a Stock Pledge Agreement in form and substance approved by Lender (the Stock Pledge Agreement) and in connection therewith Healthcare shall deliver to Lender all original stock certificates (the Stock Certificates) together with a stock power endorsed in blank (the Stock Power). |
4.5. |
Assignment of Construction Contract . Borrower shall grant Lender a first priority security interest in Borrowers interest under the Construction Contract (as defined in Section 11.2.6) pursuant to an assignment thereof in form and substance approved by Lender (the Assignment of Construction Contract). |
4
4.6. |
Assignment of Architectural Agreement . Borrower shall grant Lender a first priority security interest in Borrowers interest in the Architectural Agreement (as defined in Section 11.2.7) pursuant to an assignment thereof in form and substance approved by Lender (the Assignment of Architectural Agreement). |
4.7. |
Assignment of Plans and Specifications . Borrower shall grant Lender a first priority security interest in Borrowers Plans and Specifications (as defined in Section 11.2.4) pursuant to an assignment thereof in form and substance approved by Lender (the Assignment of Plans). |
5. GUARANTIES . Payment of the Mortgage Note will be guaranteed as follows:
5.1. |
Unlimited Guaranties . SunLink and Healthcare shall each guarantee payment of all indebtedness evidenced by the Mortgage Note, to be evidenced by guaranty agreements in form and substance approved by Lender (respectively, the SunLink Guaranty and the Healthcare Guaranty). SunLink and Healthcare are sometimes referred to hereafter together as the Guarantors. |
5.2. |
USDA Limited Guaranty . The United States Department of Agriculture or any of the agencies thereof approved by Lender (individually and collectively, the USDA) shall guarantee 70% of the indebtedness evidenced by the Mortgage Note to be evidenced by a USDA 70% Guaranty Agreement in form and substance approved by Lender and USDA pursuant to a certain Conditional Commitment for Guarantee issued by the USDA, a true and correct copy of which is attached at Exhibit B hereto (the Conditional Commitment). |
6. REPRESENTATIONS AND WARRANTIES . Borrower represents and warrants that:
6.1. |
Borrowers Existence . Borrower is, and will continue to be a corporation, duly incorporated and validly existing under the laws of the State of Georgia; Borrower has adequate power, authority and legal right to own and hold the Property; Borrower is or will be, in all material respects, duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities which in any such case is material to the ability of Borrower to carry on its business in the development, construction, equipping, operating and leasing of the Property; Borrower has adequate authority, power and legal right to enter into and carry out the provisions of this Loan Agreement and other documents contemplated herein and to consummate the transactions contemplated hereby. |
5
6.2. |
Litigation . All litigation in which the Borrower is involved as of the date hereof is set forth on Schedule 6.2 hereto. There is no action, suit, proceeding or investigation pending or threatened against Borrower, or any of the owners of Borrower which would reasonably be expected to materially adversely affect Borrower, the Property or any of Borrowers Personal Property or materially impair the ability of Borrower to carry on its business substantially as now conducted or contemplated or result in any substantial liability above applicable deductibles not adequately covered by insurance. |
6.3. |
No Default . The making and performance by Borrower of this Loan Agreement or the documents to be executed in connection herewith will not violate any material provision or constitute a material default under any indenture, agreement or instrument to which Borrower, the Property or any material portion of the Borrowers Personal Property is bound or affected. |
6.4. |
Ownership . Borrower owns good marketable fee title to the Property, and Borrower has good title to Borrowers Personal Property and, upon completion of construction and/or installation and payment therefor, all of its other properties and assets, real or personal, tangible or intangible, which are or are to be constructed, owned, installed, or used in connection with any of the Property, and none of such properties or assets is or will be subject to any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind excluding only Permitted Encumbrances as set forth at Schedule 6.4 hereto. |
6.5. |
Financial Statements . Except as set forth on Schedule 6.5A hereto, Borrowers and Guarantors financial statements heretofore delivered to Lender (Historical Financial Statements) are true and correct in all material respects, have been prepared in accordance with United States generally accepted accounting principles consistently applied (except in the case of unaudited financial statements, subject to the absence of financial footnotes and to normal and recurring year-end adjustments that are not likely to be material in amount) (GAAP), and present in accordance with GAAP the financial condition reflected therein as of the times and for the respective periods referred to therein. For purposes of this Section 6.5, Historical Financial Statements means those financial statements set forth on Schedule 6.5B. |
6.6. |
Full Disclosure . Neither this Loan Agreement nor any statements or documents of Borrower referred to herein or delivered by Borrower pursuant to this Loan Agreement contains any untrue statement of a material fact. |
6.7. |
Survival of Representations and Warranties . All covenants, representations and warranties made herein and under all documents executed pursuant hereto shall survive the making of the |
6
loans hereunder and the delivery of the Mortgage Note and other instruments executed in connection therewith until complete repayment of the Mortgage Note and all renewals and modifications thereof. Each request by Borrower for an advance hereunder shall constitute an affirmation that the foregoing representations and warranties remain true and correct as of the date of such request, or if given as of a specific date, as of such date unless otherwise disclosed, except with respect to financial statements superseded by subsequent reporting to Lender. |
7. CONDITIONS PRECEDENT TO LOAN . As soon as all of the conditions set forth at Sections 7.1 through 7.21 hereof have been satisfied, and so long as no Default has occurred hereunder, Lender will advance the entire Loan Commitment from time to time, subject to the terms of this Loan Agreement, to be used solely for the purposes set forth in Section 1 hereof.
7.1. |
Loan Documents . This Loan Agreement, the Mortgage Note, the Deed of Trust, the Assignment of Rents, the Security Agreement, the Stock Pledge Agreement, the Stock Certificates, the Stock Power, the Account Collection Agreement, the Environmental Indemnity, the Building Laws Indemnity, the SunLink Guaranty, the Healthcare Guaranty, the USDA 70% Guaranty Agreement and all other documents executed pursuant thereto or in connection therewith as might be required by Lender (all of the foregoing are referred to herein as the Loan Documents) shall have been duly authorized, executed and delivered to Lender. |
7.2. |
Authority . A certificate of the Secretary or Assistant Secretary of Borrower, SunLink and Healthcare (or other appropriate officer, including in the case of Healthcare, its sole member) dated as of the Effective Date and certifying to the following: |
7.2.1. |
A true and correct copy of the corporate (or other) resolutions of such the applicable entity authorizing the execution, delivery and performance of the Loan Documents to which such entity is a party contemplated hereby and thereby; |
7.2.2. |
The incumbency, names, titles and signatures of the officers of such entity authorized to execute the Loan Documents to which such entity is a party. |
7.3. |
Organization . A certificate of the Secretary or Assistant Secretary of Borrower, SunLink and Healthcare (or other appropriate officer, including in the case of Healthcare, its sole member) dated as of the Effective Date and certifying to the following: |
7.3.1. |
A true and correct copy of the Articles of Incorporation or Certificate of Incorporation or Organization (or the equivalent) of each such entity with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of incorporation or organization as of a date not more than thirty (30) days prior to the Effective Date; and |
7
7.3.2. |
A true and correct copy of the bylaws (or other constitutive documents such as a limited liability company operating agreement) for the applicable entity. |
7.4. |
Good Standin g. A certificate of good standing for each of Borrower, SunLink and Healthcare in the jurisdiction of its incorporation or organization and, in the case of Borrower, its good standing as a foreign corporation in the State of Mississippi, in each case certified by the appropriate governmental officials as of a date not more than thirty (30) days prior to the Effective Date. |
7.5. |
Title . A title commitment for a $9,975,000.00 mortgagees title insurance policy insuring the first priority status of the Deed of Trust shall have been issued to Lender by Statewide Title Services, Inc., as agent for Fidelity National Title Group (the Title Insurer) satisfactory to Lender reflecting that fee simple title in all of The Property is vested in Borrower, reflecting only those title exceptions approved by Lender and containing affirmative coverage against materialmens liens, an access endorsement, survey coverage, comprehensive endorsement, a zoning endorsement, a variable rate endorsement, and a tax lot endorsement, and which removes the creditors rights exclusion and the arbitration provision. |
7.6. |
Compliance with Governmental Regulations . Evidence to the satisfaction of Lender shall have been made available to Lender that (i) the Property complies in all material respects with all applicable zoning, subdivision, environmental, air quality, flood hazard, fire safety, planning, building and other governmental laws, ordinances, codes, regulations or private use restrictions to the extent any failure to do so would materially adversely affect the ability of Borrower to carry on its business substantially as presently conducted; (ii) Borrower holds all material licenses and permits required by law for Borrower to operate Borrowers hospital, nursing home and medical office businesses on the Property. |
7.7. |
Environmental Report . Lender must have received a Phase I Environmental Report covering all of the Property reflecting environmental conditions satisfactory to Lender. |
7.8. |
Survey . At Borrowers expense, an ALTA survey of the Property prepared by a licensed civil engineer or a surveyor approved by Lender shall have been delivered to Lender, which shall be prepared within sixty (60) days prior to the date hereof in compliance with the requirements of Lender. |
7.9. |
Appraisal . Lender shall have received an as-complete appraisal in form and substance satisfactory to Lender and reflecting a value for the completed MOB and all of the existing Property acceptable to Lender. |
7.10. |
Origination Fee . Borrower shall have paid or concurrently from the proceeds of the Mortgage Loan shall pay to Lender a $47,375.00 origination fee, and Borrower shall have paid to Lender for the benefit of the USDA the $209,475.00 USDA origination fee which will be deposited in the USDA Guarantee Fee Account with Lender subject to the SNB Security Agreement, on or before the date of this Loan Agreement. |
8
7.11. |
Financial Statements . The financial statements of Borrower, SunLink and Healthcare as of the end of the most recent quarter shall have been delivered to Lender. |
7.12. |
Tax returns . The filed federal income tax returns for the fiscal year ended June 30, 2011 for Borrower, SunLink and Healthcare shall have been delivered to and approved by Lender. |
7.13. |
Opinion of Borrowers Counsel . An opinion from Borrowers counsel in form and substance satisfactory to Lender shall have been delivered to Lender as to the due existence and good standing of Borrower, SunLink and Healthcare, and the due authorization of the execution and delivery of the Loan Documents, as applicable, by Borrower, SunLink and Healthcare. |
7.14. |
Conditional Commitment . Lender shall have received the fully executed Conditional Commitment from the USDA having terms and conditions satisfactory to Lender, together with all documentation satisfactory to Lender evidencing the USDAs approval of the substitution of Lender as Lender in the Conditional Commitment. |
7.15. |
Balance Sheet Equity . Lender shall have received documentation satisfactory to Lender evidencing that Borrower has a minimum of ten percent (10%) tangible balance sheet equity as of the date of this Loan Agreement. Borrowers tangible balance sheet equity will be determined in accordance with USDA requirements. |
7.16. |
Site Inspections . The Property shall have been inspected and approved by Lender. |
7.17. |
Licenses . Borrower shall have provided Lender with copies of all material licenses and permits required by law for Borrower to operate Trace Regional Hospital, Floy Dyer Manor nursing home, and the existing medical office businesses on the Property. |
7.18. |
No Prior Liens . Lender shall have been provided with written documentation satisfactory to Lender that no liens, other than those in favor of Lender and those included as Permitted Encumbrances, have been filed against the Property or Borrowers Personal Property. |
7.19. |
Insurance . Borrower shall have obtained all of the insurance as required by and in accordance with Section 8 hereof. |
9
7.20. |
Releases . Borrower shall have provided documentation satisfactory to Lender evidencing the complete release of Borrower from all personal liability owing under any other lending agreement, indebtedness or similar obligation owing to any party other than Lender in each case for money borrowed except in connection with Permitted Indebtedness (defined below). |
7.21. |
Chatham Subordination . Chatham Credit Management III, LLC, as agent (Chatham) with respect to the Amended and Restated Credit Agreement dated August 1, 2008 (as amended, restated or otherwise modified from time to time, the Chatham Credit Agreement) shall have delivered to Lender a subordination agreement in form and substance reasonably approved by Lender and Chatham. For the purpose of determining compliance with the provisions of Section 10.6 below, the subordinated indebtedness to Chatham under the Chatham Credit Agreement shall be disregarded. |
8. INSURANCE . Borrower shall obtain and maintain during the time stated below the following insurance policies and comply with the following obligations (those policies and obligations, collectively, the Required Insurance).
8.1. |
Special Perils Insurance . Borrower shall obtain and maintain at all times property insurance against all risks of loss to the Property customarily covered by All Risk or Special Perils Form policies as available in the insurance market (the Special Perils Insurance). Any Special Perils Insurance policy shall contain a coinsurance waiver and replacement cost value endorsement without reduction for depreciation. Special Perils Insurance shall cover at least the following perils: |
8.1.1. |
Building collapse, fire, flood, impact of vehicles and aircraft, lightning, malicious mischief, mudslide, subsidence, vandalism, water damage, and windstorm; and |
8.1.2. |
Such other insurable perils as, under good insurance practices, other commercial property owners from time to time insure against for property and buildings similar to the Property in height, location, nature, type of construction, and use; and |
8.1.3. |
The additional expense of demolition and increased cost of construction including increased cost from any changes in laws on restoration (which may be subject to a sub-limit for demolition and increased cost of construction of up to $10,000,000); and |
8.1.4. |
At least one hundred percent (100%) of the replacement value of all buildings and improvements now or hereafter located on the Property (which may be subject to a margin clause of up to 115% limiting coverage for each item (building, personal property, etc.) of the value reported on the statement of value as provided by Borrower to the insurer); and |
10
8.1.5. |
All tenant improvements and betterments that any of the leases on the Property require Borrower to insure (the Insured Leasehold Property). |
8.2. |
Flood Insurance . If any buildings or improvements located on the Property are located in an area designated as flood prone or a special flood hazard area under the regulations for the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, 42 U.S.C. §4001 et seq., Borrower shall obtain and maintain at all times at least the maximum coverage for the Property available under the federal flood insurance plan which may be subject to a flood blanket sublimit of up to (i) $25,000,000 with respect to Trace Regional Hospital and (ii) $10,000,000 with respect to other locations. |
8.3. |
Boiler and Machinery Insurance . Borrower shall obtain and maintain at all times comprehensive boiler and machinery insurance covering all mechanical and electrical equipment against physical damage, rent loss, extra expense, and expediting expense on the Property and the Insured Leasehold Property (the Boiler and Machinery Insurance). The Boiler and Machinery Insurance shall be on a replacement cost value basis, and, for each accident, shall cover at least the greater of: (a) Fifteen percent (15%) of full replacement cost of the buildings and improvements now or hereafter located on the Property; or (b) $500,000.00. |
8.4. |
Builders Risk Insurance . Borrower shall obtain and maintain during construction of the MOB builders risk insurance for the full completed insurable value of the MOB written on a completed value Form (100 percent non-reporting) or its equivalent and including an endorsement granting permission to occupy (the Builders Risk Insurance). Builders Risk Insurance shall cover: |
8.4.1. |
The same perils that Special Perils Insurance must cover with whatever limits and coverage extensions Lender requires, unless Borrowers Special Perils Insurance already includes that coverage; and |
8.4.2. |
Loss of materials, equipment, machinery, and supplies whether on-site, in transit, or stored offsite, or of any temporary structure, hoist, sidewalk, retaining wall, or underground property; and |
8.4.3. |
Soft costs, plans, specifications, blueprints, and models to the extent of $850,000.00; and |
8.4.4. |
Demolition and increased cost of construction, including increased costs arising from changes in laws at the time of restoration and coverage for operation of building laws, all subject to a sublimit satisfactory to Lender; and |
8.4.5. |
Business interruption (delayed opening) on an actual loss sustained basis and otherwise in compliance with Business Interruption Insurance requirements. |
11
8.5. |
Business Interruption Insurance . As an extension to Special Perils Insurance, Flood Insurance, and Boiler and Machinery Insurance, Borrower shall obtain and maintain business interruption insurance on an actual loss sustained basis (Business Interruption Insurance). Borrower shall obtain and maintain Business Interruption Insurance equal to at least $10,000,000.00. If a Default shall have occurred and then be continuing, after receipt of any Business Interruption Insurance proceeds, Lender will be entitled to apply any such proceeds to indebtedness then owing by Borrower to Lender under this Loan Agreement or the Working Capital Loan Agreement and within three (3) Business Days therewith will deposit any excess proceeds into Borrowers Operating Account. For purposes of this Loan Agreement, Business Day means any day other than (i) a Saturday or Sunday or (ii) a day on which federally chartered banking institutions are not required to be open. |
8.6. |
Liability Insurance . |
8.6.1. |
Borrower shall obtain and maintain the following insurance for personal injury, bodily injury, death, accident, and property damages (collectively, the Liability Insurance); |
(a) |
Public liability insurance, including commercial general liability insurance; |
(b) |
Owned (if any), hired, and non-owned automobile liability insurance; and |
(c) |
Umbrella liability insurance. |
8.6.2. |
Liability Insurance shall provide coverage of at least one million dollars ($1,000,000.00) per occurrence and two million dollars ($2,000,000.00) in annual aggregate. If any Liability Insurance also covers other location(s) with a shared aggregate limit, the minimum Liability Insurance shall be increased by two million dollars ($2,000,000.00). |
8.6.3. |
Liability Insurance shall include coverage for liability arising from premises and operations, elevators, escalators, independent contractors, contractual liability (including liability assumed under any contracts and leases), and products and completed operations. Borrower will use commercially reasonable efforts to cause all Liability Insurance to name Lender as an Additional Insured by endorsement. |
8.7. |
Statutory Employees Insurance . Borrower shall obtain and maintain workers compensation and disability insurance as required by law (Statutory Employees Insurance). |
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8.8. |
Fidelity Bonds . Borrower shall obtain fidelity bonds or employee dishonesty coverage for each employee of Borrower who has or will have access to any of Borrowers funds satisfactory to Lender. |
8.9. |
Medical Malpractice Insurance . Borrower shall obtain and maintain or cause to be maintained medical malpractice insurance for each medical professional employed by Borrower and Borrower shall use commercially reasonable efforts to require medical malpractice insurance to be maintained by each medical professional not employed by it working on the Property. |
8.10. |
Documentation . Borrower shall provide to Lender the following documentation: |
8.10.1. |
For Special Perils Insurance, Flood Insurance, and Boiler and Machinery Insurance, and Business Interruption Insurance (collectively, Property Insurance), Borrower shall cause Lender to be named as Lender Loss Payee or Mortgagee on a standard noncontributory mortgagee endorsement (or its equivalent) naming Lender or its designee as the party to receive insurance proceeds. |
8.10.2. |
Borrower shall provide such additional evidence of Lenders interest under any Required Insurance as Lender shall reasonably require from time to time, including the following (the Evidence of Insurance): |
(a) |
An ACORD 28 certificate of insurance for all Property Insurance and Builders Risk Insurance; and |
(b) |
A certificate of insurance evidencing Borrowers Liability Insurance; and to the extent Borrower can cause the following by commercially reasonable efforts, such certificate will evidence Lender as an additional insured and otherwise reasonably evidence compliance with the Liability Insurance requirements of the Loan Documents. |
8.10.3. |
Borrower shall deliver to Lender, promptly upon issuance and in all events within ten (10) days of Borrowers receipt of the applicable policy, copies of the insurance policies for all Required Insurance, and will use commercially reasonable efforts to obtain a representation by the carrier or its authorized representative that such copy is true and correct. Prior to any policy expiration, Borrower shall deliver evidence of renewal in compliance with the Loan Documents. |
8.11. |
Policy Requirements . Borrower shall obtain all Required Insurance from domestic carrier(s) authorized to do business in the State of Mississippi and reasonably satisfactory to Lender with: (a) A claims paying ability of not less than A (or the equivalent) by S&P and one other rating agency satisfactory to Lender; and (b) A:X or better financial strength rating by AM Best. |
13
A change in carriers rating under clause (a) or clause (b) shall not constitute a Default so long as Borrower undertakes commercially reasonable efforts to obtain substitute coverage from a carrier rated under clause (a) or clause (b) as promptly as is commercially practicable, taking into account the remaining policy periods and the cost of such substitute coverage. |
8.12. |
Blanket Coverage . Borrower may provide any Required Insurance under a blanket policy or policies covering the Property and other property and assets, provided that: |
8.12.1. |
The blanket policy otherwise meets all requirements for Required Insurance, and, except in the case of Liability Insurance, specifies how much coverage, and which sublimits, apply exclusively to the Property; and |
8.12.2. |
The amount allocated to the Property equals or exceeds the Required Insurance. |
8.13. |
Protection of Lenders Interest . |
8.13.1. |
Borrower shall cause its insurance carrier to agree: |
(a) |
to provide Lender 30 days written notice (10 days prior written notice for nonpayment of premium) prior to any cancellation, termination or nonrenewal of the required insurance; |
(b) |
to allow Lender to pay premiums to continue the policy upon notice of cancellation for nonpayment. |
8.13.2. |
Every Property Insurance policy shall by its terms remain valid and insure Lenders interest regardless of any: |
(a) |
Named insureds act, failure to act, negligence, or violation of warranties, declarations, or conditions; |
(b) |
Occupancy of use of the Property for purposes more hazardous than those permitted; or |
(c) |
Exercise of any Lenders remedies. |
If Lender reasonably deems itself insecure, on Lenders request, Borrower will be required to make monthly deposits for insurance premiums equal to one-twelfth (1/12) of the annual charges as estimated by Lender to accumulate with Lender sufficient funds to pay the insurance premiums thirty (30) days prior to their due date, such deposits to be held by Lender without interest.
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8.14. |
Lenders Rights; No Liability . |
8.14.1. |
Borrower irrevocably authorizes Lender, at any time, to communicate directly with Borrowers insurance carrier(s), broker(s), and tenant(s) about any Required Insurance. |
8.14.2. |
Any determination or request that Lender makes about any Required Insurance shall impose no obligation or liability on Lender. Borrower shall not rely on any such determination or request (or its absence) as an implied or express representation about the adequacy of Borrowers insurance. Borrower acknowledges that any such determination or request would be made solely for Lenders own benefit and not for Borrower. Borrower retains sole responsibility for the adequacy and prudence of its insurance program. |
8.14.3. |
If at any time Lender has not received satisfactory written evidence that Borrower maintains and has paid for all Required Insurance, then without limiting Lenders remedies, Lender may (but shall have absolutely no obligation to) force place any Required Insurance or take such other actions as Lender shall deem appropriate to protect its interests. Prior to force placing insurance, Lender shall give notice to the Borrower. Lenders costs of doing so shall constitute loans to Borrower, all of which Borrower agrees will be secured by the Loan Documents. |
9. ACCOUNT COLLECTIONS . Pursuant to the Account Collections Agreement, Borrower will instruct all of Borrowers account debtors that (a) the point of remittance for payments remitted by any non-electronic means shall be [Borrower to designate address]; (b) the point of remittance for electronic payments remitted by non-Medicare account debtors shall be the Operating Account; and (c) the point of remittance for all electronically transmitted payments on accounts and accounts receivable of Borrower payable from any state or the federal government or any subdivision or agency thereof, including but not limited to Medicare and Medicaid payments (the Medicare Electronic Payments) shall be the Medicare Account. Borrower will not, without the prior written consent of Lender, revoke or alter the instructions until such time as all of the indebtedness owing by Borrower to Lender has been paid in full. Without limiting the foregoing, any payments received by Borrower other than as set forth above will be deposited or transferred within five (5) Business Days into the Operating Account. Payments received by Lender will be processed in accordance with the terms and conditions of the Account Collections Agreement. Borrower authorizes and directs Lender to sweep all funds from the Medicare Account to the Operating Account on a daily basis, and in the absence of a Default, such funds in the Operating Account may be used by Borrower, all in accordance with the terms of the Account Collections Agreement. Lender agrees that Lender will not have a right of set off with respect to the Medicare Account.
10. COVENANTS . Until payment in full of the Mortgage Note and all renewals and modifications thereof, and performance of all obligations owing to Lender under this Loan Agreement and the instruments executed pursuant hereto, unless Lender shall otherwise consent in writing, Borrower covenants and agrees as follows:
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10.1. |
Performance of Obligations . Borrower will promptly and punctually perform all of the obligations hereunder and under the Loan Documents, and under all other instruments executed or delivered pursuant thereto. |
10.2. |
Information . Borrower will promptly furnish to Lender all reasonably requested information concerning the Property, the progress of the construction of the MOB and, the financial status of Borrower and updated budgets and disbursement schedules relating to the MOB. For each fiscal quarter, Borrower will provide Lender with a quarterly financial statement of Borrower (signed by an officer of Borrower charged with such responsibility as having been prepared in accordance with GAAP) within forty-five (45) days after the end of the fiscal quarter. For each fiscal year, Borrower will provide Lender with an annual financial statement of Borrower within one hundred five (105) days after the close of the fiscal year, certified by an officer charged with such responsibility as having been prepared in accordance with GAAP. If the date on which quarterly or annual financial statements would be due is not a Business Day, the date shall be extended to the next Business Day. The annual financial statements may be unaudited if Borrower is included within the consolidating statements of SunLinks audited annual financial statement. Borrower will provide Lender with such other financial reports as may be reasonably required by Lender or USDA. All financial statements will consist of at least a balance sheet, income statement and statement of cash flow. Financial reports which are not financial statements shall be prepared in such form as are customarily utilized by management, including, if applicable, in accordance with GAAP or in such other form as may be reasonably required by Lender or USDA. |
10.3. |
Guarantor Financial Statements . For each fiscal quarter, Borrower will cause SunLink and Healthcare to provide Lender with unaudited quarterly financial statements within forty-five (45) days after the end of the fiscal quarter. For each fiscal year, Borrower will cause SunLink and Healthcare to provide Lender with audited annual financial statements within one hundred five (105) days after the end of the fiscal year. If the date on which quarterly or annual SunLink or Healthcare financial statements would be due is not a Business Day, the date shall be extended to the next Business Day. Healthcares annual financial statements may be unaudited if Healthcare is included within the consolidating statements of SunLinks audited annual financial statements. All such financial statements will consist of at least a balance sheet, income statement and statement of cash flows. SunLinks financial statements will also include a statement of shareholders equity. All financial statements will be certified by an officer charged with such responsibility as having been prepared in accordance with GAAP. Borrower will cause SunLink and Healthcare to provide Lender with such other financial reports of SunLink and Healthcare as reasonably may be required by Lender |
16
or USDA. With respect to financial reports of SunLink or Healthcare that are not financial statements, such reports shall be prepared in such form as are customarily utilized by management, including, if applicable, in accordance with GAAP or in such other form as may be reasonably required by Lender or USDA. As to SunLink, SunLinks quarterly report on Form 10-Q and annual report on Form 10-K as required to be filed with the United States Securities and Exchange Commission shall be satisfactory as to form for SunLink Financial Statements and the filing thereof with the SEC via the EDGAR system shall constitute the provision thereof to Lender. |
10.4. |
Tax Returns . Borrower will cause to be provided to Lender and, as required, USDA, copies of annual filed federal tax returns for Borrower, SunLink and Healthcare (or any consolidated return with respect to one or more of them) for each year on or before the Submission Deadline. Submission Deadline is defined as the date which is fifteen (15) days after the Filing Deadline. Filing Deadline is defined as the deadline for the filing of such tax returns established by the Internal Revenue Code (the IRC) for Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) for the immediately preceding calendar year. If Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) (i) timely files an application for an extension of the Filing Deadline with the Internal Revenue Service (IRS); (ii) timely pays any estimated tax liability and satisfies any other requirements established by the IRC in order to qualify for an extension of the Filing Deadline; and (iii) provides Lender with a copy of such filed application for an extension of the Filing Deadline, evidence of the payment of any estimated tax liability, and documentation satisfactory to Lender evidencing compliance with any other requirements of the IRC on or before the Submission Deadline, Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) will thereafter provide Lender with a copy of the filed tax return on or before the date which is fifteen (15) days after the extended Filing Deadline. Borrower hereby represents, warrants, covenants and affirms to Lender that all tax returns now or hereafter provided by Borrower, SunLink and Healthcare to Lender are and will be true and correct copies of the original tax returns filed with the IRS. The delivery by Borrower, SunLink and Healthcare of each tax return to Lender shall constitute a reaffirmation that such tax return is a true and correct copy of the original tax return filed with the IRS. |
10.5. |
Accounts Receivable Reports . Commencing on July 20, 2012 and on the 20 th day of each month thereafter, so long as Borrower has a security interest in the Receivables, Borrower will provide Lender with a monthly accounts receivable report for Borrower for the immediately preceding calendar month. |
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10.6. |
Financial Covenants . |
10.6.1. |
Debt Service Coverage Ratio . Borrower will maintain a Debt Service Coverage Ratio of at least 2.85 to 1.00 during the term of the Mortgage Note and all renewals and modifications thereof. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. Debt Service Coverage Ratio means (i) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less EHR Payments, all for the immediately preceding one (1) fiscal quarter, divided by (ii) Borrowers scheduled principal payments on term debt, plus scheduled capital lease payments for the succeeding one (1) fiscal quarter plus interest expense for the immediately preceding one (1) fiscal quarter. The number of fiscal quarters used in each component of the ratio shall increase by one (1) for each subsequent testing period, up to a maximum of four (4) fiscal quarters, at which time the Debt Service Coverage Ratio shall thereafter be tested on a four quarter basis. |
10.6.2. |
Fixed Charge Coverage Ratio . Borrower will maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00 during the term of the Mortgage Note and all renewals and modifications thereof. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. The term Fixed Charge Coverage Ratio means (i) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less EHR Payments, all for the immediately preceding one (1) fiscal quarter, divided by (ii) Borrowers scheduled principal payments on term debt, scheduled capital lease payments for the succeeding one (1) fiscal quarter, plus interest expense, plus distributions to Healthcare and Net Intercompany Funding (excluding distributions and intercompany funding from EHR Payments), all for the preceding one (1) fiscal quarter. The number of fiscal quarters used in each component of the ratio shall increase by one (1) for each subsequent testing period, up to a maximum of four (4) fiscal quarters at which time the Fixed Charge Coverage Ratio shall thereafter be tested on a four fiscal quarter basis. Net Intercompany Funding means (x) the change in receivables from Affiliates during the test period less (y) the change in payables to Affiliates (excluding changes in Ordinary Affiliate Indebtedness) during the test period. |
10.6.3. |
Liquidity . Days Cash on Hand means (i) Borrowers unrestricted cash assets reported on Borrowers balance sheet plus the balance available to be advanced to Borrower under the Working Capital Note as of the test date divided by (ii) Borrowers operating expenses, excluding depreciation and bad debt expense, for the immediately preceding four (4) quarters divided by 365. Liquidity will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. For the test dates listed below, Borrower must have a minimum Days Cash on Hand as indicated below: |
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Test Dates |
Minimum Days Cash
On Hand |
|
9/30/12 |
10 | |
12/31/12 |
15 | |
3/31/13 and thereafter |
20 |
10.6.4. |
Funded Debt to EBITDA Ratio . Funded Debt to EBITDA Ratio means (i) the aggregate outstanding balances of all capital leases and all interest-bearing and non-interest-bearing notes payable, as of the test date divided by (ii) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less EHR Payments, all for the immediately preceding four (4) quarters,. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. For the test dates listed below, the Funded Debt to EBITDA Ratio shall not exceed the maximum indicated: |
Test Dates |
Maximum Funded
Debt to EBITDA Ratio |
|
9/30/12 3/31/17 |
3.5 to 1 | |
6/30/17 3/31/22 |
3.25 to 1 | |
6/30/22 and thereafter |
3.0 to 1 |
10.7. |
Financial Ratios Compliance Certificate . Borrower will provide Lender with a Compliance Certificate in the form attached hereto as Schedule 10.7 (a Financial Ratios Compliance Certificate) together with all other documentation as requested by Lender commencing November 15, 2012 and on the fifteenth (15 th ) day of every third month thereafter reflecting Borrowers computation of the Debt Service Coverage Ratio, the Fixed Charge Coverage Ratio, the number of Days Cash on Hand, and the Funded Debt to EBITDA Ratio (the Financial Covenants) for the immediately preceding applicable periods. |
10.8. |
Litigation . Borrower will promptly furnish to Lender written notice of any litigation: in which Borrower is involved which may reasonably be expected to materially adversely affect (i) the ability of Borrower to perform its obligations under the Loan Documents or (ii) the Property or which relates to construction of the MOB. |
10.9. |
Construction Standards . Borrower will construct the MOB in compliance with the Plans and Specifications approved by Lender, and in compliance with applicable ordinances, building codes, zoning regulations and other governmental requirements, including but not limited to the |
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Americans with Disabilities Act, and free from encroachment upon building lines, easements and property lines. The MOB will be designed utilizing accepted architectural and engineering practices and will conform in all material respects to applicable federal, state and local codes and requirements. If applicable, Borrower will require the architect to certify that the Property complies with the seismic requirements of Executive Order 12699. |
10.10. |
No Liens . Borrower shall not create, assume or suffer to exist any mortgage, deed of trust, pledge, lien, charge, encumbrance, or security interest on any of the Property or any of Borrowers Personal Property, excluding only encumbrances in favor of Lender and Permitted Encumbrances. |
10.11. |
Use of Loan Proceeds . Borrower shall not permit any funds advanced to Borrower under this Loan Agreement to be used for any purpose other than those purposes described in Section 1 hereof and those itemized matters disclosed in the Construction Budget. |
10.12. |
Estoppel Certificates . On request by Lender, either verbally or in writing, Borrower shall furnish promptly a written statement or affidavit, in such form as shall be satisfactory to Lender, stating the unpaid balance of the Mortgage Note and that there are no known offsets or defenses against full payment of the Mortgage Note, or if there are such offsets and defenses, specifying the same. |
10.13. |
Payment of Taxes . All taxes, assessments and governmental charges or levies imposed on Borrower or on Borrowers assets, income or profits will be paid prior to the date on which penalties attach thereto unless being contested in good faith and by appropriate procedures. If Lender reasonably deems itself insecure, on Lenders request, Borrower will be required to make monthly deposits for real estate taxes, assessments and similar charges equal to one-twelfth (1/12) of the annual charges estimated by Lender or accumulate authorized funds with Lender to pay such impositions thirty (30) days prior to their due dates, such deposits to be held by Lender in a non-interest bearing account. |
10.14. |
Books and Records . Borrower will keep and maintain adequate and proper books and records of accounts in regard to Borrowers hospital, nursing home, medical office and related businesses located on the Property, which books and records shall be sufficient in all material respects to allow the preparation of the Financial Statements in accordance with GAAP. |
10.15. |
Lenders Access . Borrower shall permit any person designated by the Lender, including but not limited to Lenders Inspector, to, in the absence of a Default, upon 48 hours prior written notice (which may be given by e-mail), and during normal business hours (i) visit and inspect any of the properties, books and financial records of Borrower, (ii) enter upon the Property, including the MOB during and after construction, including to inspect the construction progress of the MOB and all materials to be used in the construction of |
20
the MOB and to examine the current Plans and Specifications; (iii) examine and to make copies of the books of accounts and other financial records of Borrower, and (iv) discuss the affairs, finances and accounts of Borrower with, and to be advised as to the same by, its officers. Such inspections may occur no more often than once per fiscal quarter so long as no Default exists, provided, however, that during construction of the MOB, Lenders Inspector may conduct such inspections with respect to construction of the MOB at such times and intervals and with such notice as Lender or Lenders Inspector reasonably deems appropriate. Lender (or its designee) may conduct audits, at Lenders cost and expense, of Borrowers books of account, records or other papers relating to the collateral no more frequently than once each quarter unless a Default exists. Each inspection, visit, audit, examination, or reproduction of books and records or extracts thereof shall be subject to and conducted in accordance with applicable law, including all healthcare rules and regulations, including but not limited to the Health Insurance Portability and Accountability Act (HIPAA) and confidentiality of patient information. Without limiting the foregoing, the aforementioned limitations on the frequency of and payments of costs and expenses associated with visits, inspections and/or audits and any notice requirements shall cease to be applicable when any Default exists and shall not constitute a limitation on or a waiver of the rights of the USDA under applicable law. |
10.16. |
Post Completion Survey . Immediately after completion of the construction of the MOB thereon, and if required by the Title Insurer in order for the Title Insurer to issue the title insurance contemplated by this Loan Agreement, Borrower shall furnish to Lender, in form and substance acceptable to Lender, a survey of the Property showing the location of the MOB and all easements on and appurtenant to the Property in addition to those items shown in any survey required under Section 7. |
10.17. |
No Merger . Borrower will not merge into or with or consolidate with any corporation, partnership, limited liability company, or other legal entity other than a merger or consolidation (i) as to which Lender shall have been given prior written notice, (ii) in which an Affiliate of SunLink is merged into or with or consolidated with Borrower where Borrower is the survivor and immediately thereafter and after giving effect thereto Borrower is in compliance with Section 10.6, and (iii) no Default shall have occurred and then be continuing. For purposes of this Loan Agreement, Affiliate with respect to Borrower means (i) SunLink, Healthcare and any entity controlled directly or indirectly by SunLink or Healthcare; (ii) any entity controlled directly or indirectly by Borrower; (iii) any entity that directly, or indirectly through one or more intermediaries, subsequently controls Borrower (a Controlling Person); or (iv) any entity which is controlled by or is under common control with a Controlling Person. As used herein, the term control of an entity means the possession, directly or indirectly, of the power: (A) to vote 50% or more of the voting securities of such entity (on a fully diluted basis) having ordinary power to vote in the election of the governing body of such entity or (B) to direct or cause the direction of the management or policies of an entity, whether through the ownership of voting securities, by contract, or otherwise. |
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10.18. |
No Sale . Borrower will not sell, lease or convey all or any portion of the Property, or all or any portion of Borrowers Personal Property, without the advance written consent of the Bank and, if required by applicable law, USDA (such consent not to be unreasonably withheld or delayed); provided, however, that no advance written consent shall be necessary if no Default then exists or if such sale, lease or conveyance consists of (i) the sale of inventory in the ordinary course of business, (ii) the transfer or sale of equipment in connection with the replacement of such equipment with new equipment of a similar type and value, or (iii) leases made in the ordinary course of business, including but not limited to leases of the MOB or portions thereof; it being expressly anticipated that Borrower may in the future lease certain portions of the improvements situated on the Property including the MOB to third parties, in which instance Borrower shall provide copies of such leases to Lender. |
10.19. |
Business Restrictions . Borrower will not engage in any business other than the ownership and operation of hospital, nursing home, clinic and medical offices located on the Property and the provision of services related thereto and activities ancillary thereto. |
10.20. |
Subcontractors . Borrower agrees to furnish or cause to be furnished to Lender a list of all material subcontractors and suppliers who will provide labor or materials related to the construction of the MOB, together with the contact information for all such material subcontractors and suppliers. |
10.21. |
Other Information . Borrower agrees to furnish to Lender such other information concerning the business activities of Borrower, the Property and Borrowers Personal Property as Lender might reasonably request. |
10.22. |
Inspections . Subject to applicable law, including all healthcare rules and regulations, including but not limited to HIPAA and confidentiality of patient information, Borrower will provide Lender with the results of all inspections of the Property or hospital or nursing home operations, conducted by any local, state or federal regulatory, licensing or safety agency or entity. Such results will be provided to Lender within ten (10) days after the end of each calendar quarter. |
10.23. |
Contingent Liabilities . Except with respect to Permitted Contingent Liabilities as set forth in Schedule 10.23 hereto (Permitted Contingent Liabilities), Borrower will not assume, guarantee, endorse or otherwise become contingently liable for the obligation of any other person, firm or corporation. |
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10.24. |
Other Agreements . Borrower will not enter into any agreement or do any act which reasonably would be expected to cause Borrower to be unable to comply with the terms of the Loan Documents. |
10.25. |
Additional Documents . Borrower agrees to execute and deliver any documents which are necessary in the reasonable judgment of Lender to obtain, maintain and perfect the liens and security interests intended to be created by the Loan Documents or, at Lenders expense, to enable Lender to comply with any federal or state law otherwise applicable to Lender. |
10.26. |
Other Indebtedness . Except for the indebtedness identified in Schedule 10.26A hereto (the Permitted Indebtedness), Borrower will not incur any other indebtedness for money borrowed, capital lease obligations or obligations for the deferred purchase of property to any party other than Lender, except in the ordinary course of Borrowers business, without the prior written consent of Lender and USDA. Except for indebtedness identified on Schedule 10.26B hereto (Ordinary Affiliate Indebtedness), indebtedness or liabilities to affiliates of Borrower, including charges of insurance, accounting and other shared costs, shall not be considered to be in the ordinary course of Borrowers business. So long as no Default has occurred and is continuing, Borrower may also make intercompany periodic cash management transfers to and from Affiliates if such transfers are properly accounted for in determining distributions and Net Intercompany Funding for the purposes of Section 10.6 above. |
10.27. |
Bank Accounts . So long as any indebtedness is owing by Borrower to Lender, Borrower will maintain with Lender all of Borrowers bank accounts, including without limitation the Operating Account, the Medicare Account, the USDA Fee Account and the Construction Escrow Account; provided, however, Borrower may maintain (i) a local bank account(s) in Houston, Mississippi into which checks, cash payments and negotiable instruments may be deposited which will be swept weekly into one of Borrowers bank accounts with Lender and (ii) the Medicare Account may be maintained at Borrowers current bank until authorization to change such account to Lender is obtained from Medicare. |
10.28. |
Management Fees . Borrower shall pay no fees for management or similar services to any party, including but not limited to SunLink, Healthcare, or any other affiliate, parent or subsidiary of Borrower except for management fees set forth on Schedule 10.28 hereto (Permitted Affiliate Management Fees). After the occurrence and during the continuance of a Default, Borrower will not pay any Permitted Affiliate Management Fees provided that this section shall not prohibit Borrower from paying Ordinary Affiliate Indebtedness. |
10.29. |
Intercompany Loans; Dividends . Borrower will not make any distributions, loans or advances of any kind to any party or make or declare any dividend during the term of the Mortgage Note and all renewals and modifications thereof except that Borrower may: (i) make |
23
intercompany loans to SunLink and/or Healthcare so long as after making any such loan and giving effect thereto Borrower is otherwise in compliance with Section 10.6 above; (ii) declare and pay cash dividends if: (x) at the date of declaration no Default shall have occurred and be continuing and the net amount of dividends declared and made for the period from July 1, 2012 and ending on the computation date in question shall not exceed eighty percent (80%) of the net income of Borrower for the period from July 1, 2012 to such computation date (minus the case of a deficit, the net deficit of Borrower for such period); (y) Borrower shall have had positive net income after taxes for the fiscal year preceding the year in which any such dividend is proposed to be declared or paid; and (z) after giving effect to the declaration and payment of any such dividend, Borrower shall be in compliance with Section 10.6 above; (iii) pay or make distributions for Permitted Affiliate Management Fees; (iv) pay or make distributions for Ordinary Affiliate Indebtedness; and (v) pay or make distributions for Permitted Contingent Liabilities. |
10.30. |
Equal Employment Opportunity . All construction contracts relating to the Property will comply with Executive Order 11246 entitled Equal Employment Opportunity as amended and as supplemented by applicable Department of Labor regulations, debarment requirements of 7 CFR part 3017, and the Copeland Anti-Kickback Act (18 U.S.C. § 874). |
10.31. |
USDA Annual Fee Escrow . Commencing on January 20, 2013 and on January 20 th of each year thereafter, Borrower will pay Lender the annual USDA guarantee fee in the amount of 0.25% of the portion of the outstanding principal balance of the Mortgage Note guaranteed by the USDA as of December 31 st of the immediately preceding year (the Annual USDA Fee) to be deposited in the USDA Fee Account subject to the Security Agreement, which annual fee will be paid to the USDA on or before January 31 of each year. If Lender reasonably deems itself insecure, Borrower will make monthly deposits in the USDA Fee Account on the 20 th day of every month in amounts sufficient to accumulate the entire Annual USDA Fee in the USDA Fee Account on or before January 20 th of each year. |
10.32. |
Environmental Laws . Borrower will observe and comply in all material respects with applicable laws relating to health, safety, pollution, hazardous materials or other environmental matters. Borrower will give Lender prompt written notice of any violation as to any environmental matter by Borrower and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result would reasonably be expected to result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by Borrower which are material to the operations of Borrower, or (b) which will or threatens to impose a material liability on Borrower to any person or which will require a material expenditure by Borrower to cure any alleged problem or violation. |
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10.33. |
Environmental Indemnification . Borrower, Healthcare and SunLink shall indemnify Lender against potential loss from environmental contamination of the Property in accordance with an Environmental Indemnification Agreement in form and substance approved by Lender (the Environmental Indemnity). |
10.34. |
Building Laws Indemnification . Borrower, Healthcare and SunLink shall indemnify Lender against violation of certain building laws and regulations in accordance with a Building Laws Indemnification Agreement in form and substance approved by Lender (the Building Laws Indemnity). |
10.35. |
SNDAs . Borrower shall use commercially reasonable efforts to cause each tenant prior to the Effective Date who has leased any space in the Property and shall cause each tenant who leases any space in the Property after the Effective Date, in each case, to execute and deliver in favor of Lender, a Subordination, Non-Disturbance and Attornment Agreement and Estoppel Certificate in form and substance reasonably satisfactory to Lender (the SNDAs). |
10.36. |
Maintenance and Covenant against Waste; MEP Inspection . Borrower at all times shall (a) keep the Property in good order and repair; (b) promptly repair, restore, replace or rebuild any part of the Property which may be damaged or destroyed by ordinary wear and tear or by any casualty whatsoever or which may be affected by any condemnation proceedings or exercises of eminent domain; and (c) promptly notify the Lender of any damage to the Property in excess of Twenty-Five Thousand Dollars ($25,000.00). Borrower will not unreasonably defer maintenance in connection with any mechanical, electrical, plumbing, HVAC, or other system the failure of which would have a material adverse affect on the Borrowers ability to conduct Borrowers business on the Property. Borrower will not, without the prior written consent of Lender, commit or suffer any material waste of the Property and will not commit or suffer any demolition, removal or material alteration of any of the buildings or improvements considered together with the fixtures on the Property without the written consent of Lender, which consent will not be unreasonably refused, conditioned, or delayed. |
10.37. |
USDA Covenants . Borrower agrees to promptly perform and comply with all of the conditions and covenants contained in the Conditional Commitment, including but not limited to each of the following: |
10.37.1. |
Capital Expenditures . Commencing with the fiscal year beginning July 1, 2013 and exclusive of the $850,000.00 funded from the Construction Escrow Account, Borrower will not make capital expenditures in any fiscal year in excess of an aggregate amount of $250,000.00 per year without the consent of Lender, which consent shall not be unreasonably refused, conditioned or delayed. |
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10.37.2. |
Debt to Tangible Net Worth Ratio . Commencing on June 30, 2012, and tested as of the last day of every third month thereafter, Borrower will maintain a Debt to Tangible Net Worth Ratio of no more than 9.00 to 1.00 during the term of the Mortgage Note and all renewals and modifications thereof. Debt to Tangible Net Worth Ratio will mean the ratio of (i) Borrowers total liabilities divided by (ii) Borrowers tangible net worth, all as determined in accordance with GAAP. |
10.37.3. |
Current Ratio . Commencing September 30, 2012 and tested as of the last day of every third month thereafter, Borrower will maintain a Current Ratio of at least 1.00 to 1.00 during the term of the Mortgage Note and all renewals and modifications thereof. Current Ratio means the current assets of Borrower divided by the current liabilities of Borrower computed in accordance with GAAP. |
10.37.4. |
Cash . Borrower will at all times maintain a minimum of $250,000.00 in cash on hand inclusive of the amounts deposited under all escrows under this Loan Agreement and minus the amount of any undrawn commitment under the Working Capital Loan Agreement. |
10.37.5. |
Retained Earnings . Borrower will maintain retained earnings as verified by year-end financial statements of not less than $4,000,000.00 so long as the Mortgage Note shall be outstanding or until the Lender and the USDA shall agree to a lesser amount. |
11. ADMINISTRATION OF CONSTRUCTION ESCROW ACCOUNT . After satisfaction of the conditions in Section 7, Lender shall advance $850,000.00 of the Loan Commitment to the Borrower which shall be funded into the Construction Escrow Account from which Borrower shall be entitled to make draws, subject to the following:
11.1. |
Purpose . The amounts to be drawn shall be used for the sole purposes as set forth in Section 1 hereof. |
11.2. |
Conditions Subsequent to Escrow Funding . If the following conditions are not satisfied within 120 days of funding to the Construction Escrow Account, the Borrowers right to draw from the Construction Escrow Account shall be deemed terminated in accordance with Section 11.7 below: |
11.2.1. |
Inspector . Agreements among Lender, Lenders Inspector (defined below), Borrower, and Borrowers contractor shall have been executed and delivered to Lender. |
11.2.2. |
Soil Testing . A soil test report, the results of which shall be satisfactory to Lender from Borrowers architect or engineer stating that the foundations and structural members of the MOB have been adequately designed considering soil conditions at the Property shall have been delivered to Lender and approved by Lender and Lenders Inspector. |
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11.2.3. |
Initial Project Review . Lenders Inspector shall have performed an Initial Project Review for construction of the MOB and Borrower shall have satisfied all requirements reasonably made by Lenders Inspector as a result of such review. |
11.2.4. |
Plans and Specifications . Complete copies of the final plans and specifications relating to the MOB initialed by Borrower and Borrowers Architect (the Plans and Specifications) shall have been delivered to and approved by Lender, Lenders Inspector and USDA. The Plans and Specifications shall not be changed without the prior written consent of Lender and USDA, unless such changes do not result in an increase in the Construction Budget or the guaranteed maximum price set forth in the Construction Contract. |
11.2.5. |
Construction Budget . The Construction Budget must have been delivered to and approved by Lender, Lenders Inspector and USDA (the Construction Budget). |
11.2.6. |
Construction Contract; Bonds . A copy of Borrowers executed construction contract, which is in a fixed price amount not greater than that reflected on the Construction Budget, for the construction of the MOB with a general contractor satisfactory to Lender (the Construction Contract) shall have been delivered to Lender and shall have been approved by Lender, Lenders Inspector and USDA, and Borrower shall have executed and delivered to Lender the Construction Contract Assignment. Borrower shall have also delivered to Lender written evidence satisfactory to Lender that Borrower has obtained a payment and performance bond covering the Construction Contract in form and substance satisfactory to Lender. |
11.2.7. |
Architects Contract . A copy of Borrowers executed architectural contract (the Architectural Agreement), which is in a fixed price amount not greater than that reflected on the Construction Budget, relating to the MOB, shall have been delivered to Lender and shall have been approved by Lender, Lenders Inspector and USDA, and Borrower shall have executed and delivered to Lender the Assignment of Architectural Agreement. |
11.2.8. |
Building Permit . Borrower shall have obtained a building permit for the construction of the MOB (the Building Permit). |
11.2.9. |
Documents . Lender shall have received the Assignment of Construction Contract, the Assignment of Architectural Agreement, and the Assignment of Plans. |
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11.3. |
Requests for Draws . For each draw under the Construction Escrow Account, Borrower shall deliver to Lender, a draw request for construction costs in accordance with the Construction Budget, in form reasonably satisfactory to Lender (the Draw Request), and stating the amount of disbursement requested, at least ten (10) days before the requested date of disbursement. Each Draw Request shall be approved and signed by Borrower and Lenders Inspector and shall be accompanied by billing statements, vouchers and invoices as required by Lender or Lenders Inspector. Lender will release funds from the Construction Escrow Account for the actual costs incurred for construction of the MOB within the estimates set forth in the Construction Budget. Each Draw Request will expressly warrant that the work for which the advance is requested has been performed in all material respects in accordance with the Plans and Specifications and is for actual costs incurred for the construction of the MOB within the estimates set forth in the Construction Budget. Each Draw Request shall constitute an affirmation made by Borrower that Borrower is not in breach of its obligations under this Agreement and that no Default, or any event that with the passage of time would be a Default, has occurred and is continuing. Each Draw Request shall constitute an affirmation that Borrowers portion of all previously incurred construction costs have been paid in all material respects. Each Draw Request is subject further to the following conditions: |
11.3.1. |
each of the conditions in Section 11.2 shall have been satisfied; |
11.3.2. |
proof, satisfactory to Lender, that all invoices for labor and materials have been paid, except those contained in the current Draw Request; |
11.3.3. |
a list of every material subcontractor who provided labor and/or materials relating to the current Draw Request; |
11.3.4. |
lien waivers from the general contractor and each of the subcontractors contained in the list provided to Lender referenced above in Section 11.3.2; |
11.3.5. |
lien waivers and/or lien releases from payees under previous Draw Requests if not previously submitted; |
11.3.6. |
any written approval required from the USDA for Lender to fund the current Draw Request; |
11.3.7. |
a report signed by Borrowers Architect, and by Lenders Inspector, which shall specify the estimated percentage of completion of the MOB, together with detailed comments on the specific work performed since the date of the last report rendered to Lender, and which will certify that all work previously performed in developing, constructing and equipping the MOB has been completed in all material respects in accordance with the Plans and Specifications; |
11.3.8. |
an endorsement to Lenders mortgagees title insurance policy, extending the effective date of the policy to the date of the endorsement, showing no liens of record or additional encumbrances not acceptable to Lender, and increasing the effective amount of the coverage to the total amount outstanding under the Mortgage Note; |
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11.3.9. |
a foundation survey shall have been delivered within a reasonable time after completion of the foundation, showing all construction to be within the property lines and disclosing no encroachments or violations of setback or other restrictions; |
11.3.10. |
verification that the actual costs in the aggregate of construction of the MOB do not exceed the aggregate budgeted costs on an itemized basis in any material respect as shown in the Construction Budget, and such other itemization and information with respect to such costs as may be requested by Lender; provided that Borrower may amend the items in the Construction Budget if (a) Borrower gives Lender written notice thereof, (b) the total amount of the Construction Budget is not increased, and (c) the total amount of the Construction Contract is not increased, unless such increases have been previously approved by Lender, Lenders Inspector, and USDA in writing; |
11.3.11. |
a schedule, reasonably satisfactory to Lender, of the estimated amount and time of disbursements of the cash advances to be made hereunder; |
11.3.12. |
evidence, reasonably satisfactory to Lender, that Borrower has sufficient financial resources to complete the construction and equipping of the MOB to any extent by which the costs shall exceed the amount of the Mortgage Note; |
11.3.13. |
if requested by Lender, proof that all materials and equipment constituting the MOB building or a fixture and any other fixtures incorporated in the MOB have been purchased so that absolute ownership is vested in Borrower; and |
11.3.14. |
All of the above information shall be obtained and submitted to Lender at Borrowers expense. |
11.4. Inspection . Lender or USDA may, at Lenders or USDAs option, cause the Property to be inspected by an Inspector designated by Lender (the Lenders Inspector), at Borrowers expense, before funding any Draw Request for a reasonable time prior to funding such Draw Request, and Lender shall not be required to fund any Draw Request until such examination has been made. Any such inspection shall not be unreasonably withheld, conditioned, or delayed. Borrower agrees to pay monthly billings of Lenders Inspector for inspection services. Notwithstanding (a) Borrowers payment of monthly billings to Lenders Inspector for inspection services, and/or (b) any prior written or verbal statements to the contrary, Borrower acknowledges and agrees that (i) the services provided by Lenders Inspector are solely for the benefit of Lender in connection with Lenders administration of the loan contemplated hereby; and (ii) Lenders Inspector shall owe no duty, contractual or otherwise, to Borrower in connection with the services provided by Lenders Inspector to Lender.
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11.5. Disbursements . The Construction Escrow Account shall be drawn only for payment of the approved costs of development of the building site and construction and equipping of the MOB and other costs incidental thereto and approved herein, or, at the discretion of Lender, such draw may be made by delivering checks to approved payees whose invoices are entitled to be paid from the proceeds of the Construction Escrow Account. Notwithstanding the foregoing disbursement procedure, in the event of a continuing Default hereunder or under the terms of any of the Loan Documents executed pursuant hereto, Lender may, at its discretion, make all disbursements to a title company escrow account, and such title company will draw checks on such account for payment of the items approved by Lender. Any expense incurred because of the disbursement through a controlled title company escrow account shall be paid by Borrower.
11.6. Retainage . An amount equal to 10% of that portion of each requested disbursement which is payable to Borrowers contractor or any subcontractor for work performed on construction of the MOB or materials delivered to the building site, shall be retained by Lender (herein called the Retainage); provided, however, Lender shall withhold Retainage only to the extent Borrower has withheld retainage or is required to withhold retainage under the Construction Contract. The Retainage shall be disbursed by Lender to Borrower upon the expiration of thirty (30) days after the completion of the MOB in accordance with the Plans and Specifications, provided:
11.6.1. |
a Draw Request shall have been submitted with respect to the Retainage; |
11.6.2. |
all governmental requirements shall have been satisfied, and a certificate of occupancy and other certificates evidencing completion of the MOB shall have been issued, if appropriate; |
11.6.3. |
final endorsements to Lenders title insurance policy shall have been issued without reflecting any liens or encumbrances as exceptions to coverage, and which provides affirmative coverage against liens; |
11.6.4. |
there shall be no Default under this Loan Agreement or any of the Loan Documents which shall have occurred and be continuing and all other conditions enumerated in this Loan Agreement shall have been satisfied in all material respects. |
11.7. Termination of Drawing Rights . Lender shall not be obligated to fund any Draw Requests if: (i) any of the Loan Documents is not valid and in full force and effect; (ii) a Default shall have occurred and then be continuing for thirty (30) days under the terms of this Loan Agreement or any of the Loan Documents; (iii) Borrower notifies Lender that Borrower elects not to proceed with construction of the MOB; or (iv) material issues identified in the initial project review by Lenders inspector are not addressed to the good faith and reasonable satisfaction of Lenders inspector. Upon termination of drawing rights, Lender shall be entitled to offset the balance of the Construction Escrow Account and apply it to the Mortgage Note.
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12. ANTI-MONEY LAUNDERING AND INTERNATIONAL TRADE CONTROLS .
12.1. |
Compliance with International Trade Control Laws and OFAC Regulations . Borrower represents, warrants and covenants to Lender that: |
12.1.1. |
Borrower is not now nor shall Borrower be at any time until after the Mortgage Note, and all renewals and modifications thereof, is fully repaid a person with whom a U.S. person, including a financial institution, is prohibited from transacting business of the type contemplated by this Loan Agreement, whether such prohibition arises under U.S. law, regulation, executive orders or lists published by the Office of Foreign Assets Control (OFAC) of the Department of the Treasury of the United States of America (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise; |
12.1.2. |
None of Borrower, Healthcare, SunLink or any person after the Effective Date who owns a direct interest in Borrower or any person after the Effective Date who controls any person who owns a direct or indirect interest in Borrower is now or shall be at any time until after the Mortgage Note, and all renewals and modifications thereof, is fully repaid a person with whom a U.S. person, including a financial institution, is prohibited from transacting business of the type contemplated by this Loan Agreement, whether such prohibition arises under U.S. law, regulation, executive orders or lists published by the OFAC (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise. |
12.2. |
Borrowers Funds . Borrower represents, warrants and covenants to Lender that: |
12.2.1. |
Borrower has taken, and shall continue to take until after the Mortgage Note, and all renewals and modifications thereof, is fully repaid, such measures as are required by applicable law to verify that the funds invested in Borrower are derived (a) from transactions that do not violate U.S. law nor, to the extent such funds originate outside the United States, do not violate the applicable laws of the jurisdiction in which they originated; and (b) from permissible sources under U.S. law and to the extent such funds originate outside the United States, under the laws of the jurisdiction in which they originated; |
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12.2.2. |
None of Borrower, Healthcare, SunLink, any person after the Effective Date who owns a direct interest in Borrower, or any person after the Effective Date who controls any persons who owns a direct or indirect interest in Borrower, or, to Borrowers knowledge, any person providing funds to Borrower (a) is under investigation by any governmental authority for, or has been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities, any crimes which in the United States would be predicate crimes to money laundering, or any violation of any state or federal anti-money laundering laws; (b) has been assessed civil or criminal penalties under any state or federal anti-money laundering laws; and (c) has had any of its/his/her funds seized or forfeited in any action under any state or federal anti-money laundering laws; |
12.2.3. |
Borrower shall make payments on the loan evidenced by the Loan Documents using funds invested in Borrower, donations and pledges, grants, operating revenues or insurance proceeds unless otherwise agreed to by Lender; |
12.2.4. |
As of the Effective Date and at all times during the term of the Mortgage Note and all renewals and modifications thereof, all operating revenues are and will be derived from lawful business activities of Borrower or Borrowers tenants or other permissible sources under U.S. law; and |
12.2.5. |
On the Maturity Date, Borrower will take all necessary steps to verify that funds used to repay the Mortgage Note in full (whether in connection with a refinancing, asset sale or otherwise) are from sources permissible under U.S. law and to the extent such funds originate outside the United States, permissible under the applicable laws of the jurisdiction in which they originated. |
13. DEFAULT . Each of the following shall constitute a default hereunder and under each of the Loan Documents (Default):
13.1. |
Nonpayment of Notes . Failure to make payment when due of any interest on or principal of the Mortgage Note or the Working Capital Note, or any renewals or modifications thereof and such failure shall continue for a period of three (3) Business Days or more after the date due; or |
13.2. |
Working Capital Loan Agreement Default . The occurrence and continuance of any Default (as defined therein) under that certain Working Capital Loan Agreement as defined therein of even date herewith signed by Borrower and Lender in connection with the Working Capital Note; or |
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13.3. |
Chatham Credit Agreement Default . The occurrence of any Event of Default (as defined therein) under the Chatham Credit Agreement which shall have occurred and then be continuing.; or |
13.4. |
Other Nonpayment . Failure to make payment when due of any other amount payable under the terms of this Loan Agreement or any of the Loan Documents within five (5) Business Days of the receipt of written demand therefor from Lender (unless the same or amount thereof is being contested in good faith by Borrower); or |
13.5. |
Breach of Covenants . Breach by Borrower in the performance or observance of any covenant made under this Loan Agreement or any of the Loan Documents, or under the terms of any other instrument delivered to Lender in connection with this Loan Agreement, provided that with respect to any such covenants which are non-monetary in nature, Borrower will have thirty (30) days following receipt of written notice from Lender to Borrower to cure the breach of such covenant before such occurrence will constitute a Default hereunder; or |
13.6. |
Creation of Liens . Excepting Permitted Encumbrances, the creation or enforcement of any lien, deed of trust, pledge, security interest, encumbrances or other lien (including a lien of attachment, judgment or execution) securing a charge or obligation affecting any or all of the Property or all or any of Borrowers Personal Property which continues more than thirty (30) days following receipt of written notice from Lender; or |
13.7. |
Change of Ownership . Except as permitted in Section 10.18, the assignment, sale, transfer, encumbrance or conveyance of all or any portion of the Property not otherwise permitted by the Loan Documents without the prior written consent of Lender and USDA, or if the ownership of the Property becomes vested in a person or entity other than Borrower without the prior written consent of Lender and USDA, or if there is a change in control of Borrower from Guarantor or any other wholly-owned subsidiary of SunLink which shall guarantee the obligations of Borrower under the Loan Agreement without Lenders and USDAs prior written consent; or |
13.8. |
Liquidation or Disposition of Assets . The liquidation or dissolution of Borrower or Borrower entering into any partnership, joint venture, syndicate, pool, operating agreement, or other combination with respect to all of the operations of the Borrowers hospital or nursing home whether in a single transaction or a series of related transactions or the assets or properties of Borrower substantially as an entirety, or except in the ordinary course of business (including with respect to the disposition of used or obsolete Equipment), the conveyance, sale, assignment or lease of any material part of the assets or business of Borrower, except in all such cases as otherwise provided by this Loan Agreement (including Sections 10.17 and 10.18), without the prior written consent of Lender and USDA; or |
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13.9. |
Judgment . Entry by any court of final, non-appealable judgment (and the expiration of all appeals) against Borrower and not covered by insurance in excess of $100,000.00, or an attachment of any property of Borrower which is not discharged to the reasonable satisfaction of Lender within sixty (60) days thereof; or |
13.10. |
Casualty Loss; Condemnation . Substantial damage or destruction by casualty or taking by rights of eminent domain of all or any substantial portion of the Property so as to materially and adversely affect Borrowers ability to perform Borrowers obligations hereunder; or |
13.11. |
Variance from Plans and Specifications . Changes in the approved Plans and Specifications or any other changes in the construction of the MOB by Borrower, without Lenders and USDAs prior written consent unless such changes do not exceed the amount of the Construction Budget or the guaranteed maximum price contained in the Construction Contract; or |
13.12. |
Work Stoppage . The abandonment or cessation of the work on the MOB for a period of thirty (30) consecutive calendar days, unless such cessation (but not such abandonment) shall have been the result of an act of God or other cause, which, with the exercise of due diligence, Borrower was unable to prevent or overcome; or |
13.13. |
Bankruptcy . The occurrence of any of the following: (i) the institution of bankruptcy reorganization, liquidation or receivership proceedings by or against Borrower, SunLink or Healthcare or any parent of Borrower or any controlled affiliate or subsidiary of Borrower which are not dismissed within sixty (60) days after the filing thereof, or (ii) the making of any assignment for the benefit of creditors by or against Borrower, SunLink or Healthcare or any parent of Borrower or any controlled affiliate or subsidiary of Borrower, or (iii) if Borrower, SunLink or Healthcare or any parent of Borrower or any controlled affiliate or subsidiary of Borrower becomes insolvent, or (iv) any admission by Borrower, SunLink or Healthcare or any parent of Borrower or any controlled affiliate or subsidiary of Borrower of its or their inability to pay debts as such debts mature; or |
13.14. |
Termination of Existence . Borrower ceases to be a validly existing Georgia corporation; or |
13.15. |
Governmental Requirements . The issuance of any order, decree or judgment pursuant to any judicial or administrative proceeding declaring that the Property, the MOB, the construction of the MOB, or the operation of the Property (including the MOB) is in material violation of any federal, state or local law, ordinance, rule or regulation which in any such case would materially adversely affect Borrowers business; or |
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13.16. |
Representations . Any representation, warranty, statement, certificate, schedule or report made or furnished to Lender by Borrower proves to be false or erroneous in any material respect at the time of the making thereof, and Borrower fails to take or cause to be taken corrective measures with respect to such representations or warranties satisfactory to Lender within thirty (30) days after written notice by Lender, and such corrective measures are not completed to Lenders satisfaction within sixty (60) days after such written notice is given; or |
13.17. |
Loan Documents . Any of the Loan Documents cease to be valid, legally binding or enforceable which renders such documents inadequate for the realization of the material benefits intended to be provided thereby; or |
13.18. |
Revocation of Authorization . (i) The revocation by Borrower of any of the authorizations contained in the Account Collection Agreement to sweep daily all funds contained in the Medicare Account into the Operating Account; or (ii) the revocation or modification of any authorization or instruction to any of Borrowers account debtors in a manner inconsistent with the Account Collection Agreement (Lender agrees that it must honor any such revocation by Borrower described in this Section 13.18 notwithstanding the fact that any such revocation constitutes a Default hereunder); or |
13.19. |
Loss of Licenses . The suspension or termination of any of Borrowers licenses or permits which are required by law and which suspension or termination would materially adversely affect Borrowers ability to operate Borrowers hospital, nursing home, medical offices and related businesses on the Property substantially as presently conducted; or |
13.20. |
Certificate of Completion . The failure of Borrower to obtain and provide Lender with a copy of a certificate of substantial completion of the MOB from Borrowers general contractor on or before March 31, 2013 except in the case of any delay resulting from any act of God, strike or labor disturbance, shortage of materials, change in law, regulation or governmental restriction or other cause beyond the reasonable control of Borrower; or |
14. REMEDIES . On the occurrence of a Default, as defined in Section 13 of this Loan Agreement, Lender may, at its option:
14.1. |
Acceleration of Note . Terminate making advances under the Mortgage Note, and the Loan Documents, and declare the Mortgage Note or any renewals or modifications thereof to be immediately due and payable whereupon the Mortgage Note or any renewals or modifications thereof shall become forthwith due and payable without presentment, demand, protest or notice of any kind, and Lender shall be entitled to proceed simultaneously or selectively and successively to enforce its rights under the Mortgage Note, the Deed of Trust, this Loan Agreement, and any or all of the Loan Documents, and any of the instruments executed pursuant to the terms thereof, or in connection therewith to evidence or secure the obligations of Borrower, and all renewals and modifications thereof. Nothing contained herein shall limit Lenders rights and remedies available under applicable law. |
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14.2. |
Selective Enforcement . In the event Lender shall elect to selectively and successively enforce its rights under any of the Loan Documents, such action shall not be deemed a waiver or discharge of any other lien, encumbrance or security instrument securing payment of the Mortgage Note until such time as Lender shall have been paid in full all sums advanced under the Mortgage Note. The foreclosure of any lien provided pursuant to the terms of the Loan Documents without the simultaneous foreclosure of all such liens shall not merge the liens granted which are not foreclosed with any interest that Lender might obtain as a result of such selective and successive foreclosure. |
14.3. |
Completion by Lender . Subject to applicable law, Lender shall have the right, but shall not be obligated, to take possession of the Property and proceed to complete the construction of the MOB according to the Plans and Specifications. In connection therewith, Borrower hereby appoints Lender as Borrowers true and lawful attorney-in-fact with the full power of substitution (which appointment is coupled with an interest and irrevocable) to complete, or cause to be completed, the MOB in Borrowers name and shall empower Lender as follows: to use any funds of Borrower, including any balance which may be held in escrow and any funds which remain unadvanced under the Mortgage Note for the purpose of completing the MOB in the manner called for in the Plans and Specifications; to make changes and corrections in the Plans and Specifications which shall be deemed necessary or desirable by Lender; to employ such contractors, subcontractors, agents, architects and inspectors as shall be required; to pay, settle or compromise all existing bills and claims which are or may be liens against the Property or any part thereof or may be necessary or desirable for completion of the work or the clearance of title; to execute all applications and certificates in Borrowers name which may be required by any contract relating to construction of the MOB; and to do any and every act with respect to construction of the MOB which Borrower may do in its own behalf. It is understood and agreed that this power of attorney shall be deemed to be a power coupled with an interest which cannot be revoked. Lender, as Borrowers attorney-in-fact, shall also have the power to prosecute and defend all actions or proceedings in connection with the construction of the MOB on the Property and to take such action and require such performance as is deemed necessary. At the time Lender takes possession of the Property, all proceeds to complete construction of the MOB, and all materials on or near the Property or improvements shall become the property of Lender to be used in said completion. The cost of said completion shall become an obligation payable to Lender by Borrower. Lender is authorized to add all costs necessary to complete construction of the MOB to Borrowers indebtedness owing to Lender, holding the instruments executed in connection with this loan as security for the payment thereof, irrespective of whether the aggregate amount of such costs and the sums previously advanced hereunder exceed the Loan Commitment. |
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14.4. |
Cumulative Remedies . The rights and remedies of Lender provided by the Loan Documents are cumulative and no right or remedy will be exclusive of any other or of any other right or remedy which Lender might otherwise have by virtue of the occurrence of a Default and the exercise of any right or remedy by Lender will not impair Lenders standing to exercise any other right or remedy. |
14.5. |
Deposits; Setoff . Regardless of the adequacy of Borrowers Personal Property, any deposits or other sums credited by or due from Lender to Borrower under this Loan Agreement or the Working Capital Loan Agreement, will at all times constitute collateral security for all obligations of Borrower to Lender under this Loan Agreement or the Working Capital Loan Agreement, and, except with respect to funds in the Medicare Account, which Lender agrees are not subject to set off, may be set off against any and all liabilities, direct or indirect, absolute or contingent, now existing or hereafter arising, of Borrower to Lender under this Loan Agreement or the Working Capital Loan Agreement. The rights granted by this paragraph will be in addition to the rights of Lender under any statutory bankers lien. |
14.6. |
Appointment of Receiver . Lender will be entitled to obtain a court appointed receiver for the Property without notice to Borrower, SunLink or Healthcare, which notice is hereby waived. |
15. MISCELLANEOUS . It is further agreed as follows:
15.1. |
Origination . Contemporaneously with the execution, closing and delivery of the Loan Documents, Borrower will pay Lender a loan origination fee equal to $47,375.00 and Borrower will pay Lender the USDA guarantee fee of $209,475.00 to be deposited in the USDA Fee Account subject to the Security Agreement, to be paid to the USDA. |
15.2. |
Expenses . Whether or not advances under this Loan Agreement are actually made, Borrower agrees to pay all fees, expenses and charges in respect to the loan contemplated by this Loan Agreement and the Loan Documents, including, without limiting the generality thereof, the following: |
15.2.1. |
the reasonable fees and out of pocket expenses of legal counsel employed by Lender in connection with the negotiation and preparation of the Loan Documents and the closing of this loan; |
15.2.2. |
all expenses incidental to obtaining a first priority Mississippi Deed of Trust on the Property, abstracting costs, title examination fees, title insurance premiums, mortgage taxes, documentary stamp taxes, and closing costs; |
37
15.2.3. |
survey costs, appraisal costs and costs for environmental reports, soil reports, and structural design reports; |
15.2.4. |
recording and filing fees and notary fees; |
15.2.5. |
fees of Lenders Inspector; |
15.2.6. |
other reasonable fees and expenses involved in the closing of this loan; |
15.2.7. |
In addition to the legal fees described at Section 15.2.1, all attorneys fees and expenses payable by Lender which are incidental to (a) the enforcement or defense after the occurrence and during the continuance of a Default of any or all of the Loan Documents and any instrument executed pursuant thereto; (b) the negotiation and preparation of any renewals or modifications to any of the Loan Documents requested by Borrower, SunLink or Healthcare; and (c) rendering any advice to Lender related to the Loan Documents, and any transactions contemplated thereby or related to the enforcement or defense thereof after the occurrence and during the continuance of a Default; and |
15.2.8. |
Borrowers obligations for fees, costs, expenses and charges under this Loan Agreement shall be in addition to its obligation to pay the amount of the non-refundable origination and guarantee fees described at Section 15.1 hereof. |
15.3. |
Notices . Any notices or other communications required or permitted hereunder shall be sufficiently given if delivered personally, by next day courier service or sent by confirming facsimile transmission or by registered or certified mail, postage prepaid, return receipt requested and addressed as listed below or to such other address as the party concerned may substitute by written notice to the other. All notices shall be deemed received on the date of personal delivery or courier delivery, the date of confirmation of receipt of a facsimile transmission, or within three days (excluding Saturdays, Sundays and holidays recognized in the United States) after being mailed: |
To Borrower: |
Southern Health Corporation of Houston, Inc. |
900 Circle 75 Parkway |
Atlanta, GA 30339 |
Attn: Mark Stockslager |
With a copy to: |
Smith, Gambrell & Russell, LLP |
1230 Peachtree Street, NE |
Suite 3100, Promenade Two |
Atlanta, GA 30309 |
Attn: Howard E. Turner, Esq. |
38
To Lender: |
Stillwater National Bank and Trust Company |
6301 Waterford Boulevard, Suite 101 |
Oklahoma City, Oklahoma 73118 |
Attn: Chief Credit Officer |
With a copy to: |
Bryan J. Wells and Jared D. Giddens |
Conner & Winters, LLP |
One Leadership Square |
211 N. Robinson, Suite 1700 |
Oklahoma City, OK 73102 |
Fax No.: (405) 232-2695 |
15.4. |
Amendment and Waiver . This Loan Agreement and the Loan Documents may not be amended or modified in any way, except by an instrument in writing executed by all of the parties thereto; provided, however, Lender may, in writing: (i) extend the time for performance of any of the obligations of Borrower; (ii) waive any breach or Default by Borrower; and (iii) waive the satisfaction of any condition that is precedent to the performance of Lenders obligations under this Loan Agreement. In the event of a waiver of a breach or Default by Lender, such specific breach or Default shall be deemed to have been cured and not continuing, but no such waiver shall extend to the reoccurrence of the same breach or Default or any subsequent or other breach or Default or impair any consequence of such subsequent or other breach of Default. |
15.5. |
Non-Waiver; Cumulative Remedies . No failure on the part of Lender to exercise and no delay in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right hereunder preclude any other or further right of exercise thereof. The remedies herein provided are cumulative and not alternative. |
15.6. |
Applicable Law . This Loan Agreement, all of the Loan Documents and all other documents executed pursuant thereto and in connection therewith to evidence or secure the loans contemplated hereby shall be deemed to be a contract made under the laws of the State of Oklahoma, except the Deed of Trust and Assignment of Rents which shall be governed by Mississippi law respectively. Nothing in this Loan Agreement shall be construed to constitute Lender as a joint venturer with Borrower or to constitute a partnership among any of such parties. |
15.7. |
Descriptive Headings . The descriptive headings of the sections and paragraphs of this Loan Agreement are for convenience only and shall not be used in the construction of the terms hereof. |
15.8. |
Integrated Agreement . This Loan Agreement, all of the Loan Documents and the other loan documents executed pursuant hereto or in connection herewith constitute the entire agreement between the parties hereto, and there are no agreements, understandings, warranties or representations between the parties other than those set forth in such documents. |
39
15.9. |
Time of Essence . Time is of the essence of this Loan Agreement. |
15.10. |
Binding Effect . This Loan Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors, personal representatives, legal representatives and assigns. |
15.11. |
Third Party Beneficiary . Nothing in this Loan Agreement, express or implied, is intended to confer on any person, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Loan Agreement. |
15.12. |
Right to Defend . Lender shall have the right, but not the obligation, at Borrowers expense, to commence, to appear in or to defend any action or proceeding (initiated by a third party against Borrower) excluding any insured medical malpractice suit or claim, purporting to affect the rights or duties of the parties hereunder and in connection therewith pay out of the funds of the loan all necessary expenses, including fees of counsel, if Borrower fails to so commence, appear in or defend any such action or proceedings with counsel reasonably satisfactory to Lender. |
15.13. |
Participation . Lender is authorized to sell participation interests in the loan evidenced by this Agreement to other financial institutions; and Borrower agrees that subject to the terms of the agreements of participation, each holder of a participation interest will be entitled to rely on the terms of the loan documents executed in connection herewith as if such holder had been named as an original party to the loan documents. Borrower hereby ratifies and authorizes the delivery by Lender either before or after closing of any and all financial and other information regarding Borrower, together with copies of the Loan Documents, to any potential or actual participant. |
15.14. |
Disclosure of Information; Confidentiality . Lender agrees to hold any confidential information that it may receive from the Borrower, Guarantor or SunLink pursuant to this Loan Agreement in confidence, except for disclosure: (a) on a confidential basis to legal counsel, independent public accountants and other professional advisors of Lender; (b) to regulatory officials having jurisdiction over Lender; (c) as required by applicable law or legal process (provided that, in the event Lender is so required to disclose such confidential information, Lender shall promptly notify Borrower, so that Borrower, Guarantor or SunLink or any of them may seek a protective order or other appropriate remedy) or in connection with any legal proceeding between Lender and Borrower, Guarantor, SunLink or any of them; and (d) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of Lenders interests hereunder or a participation |
40
interest in the Loan, provided that such disclosure is made subject to an appropriate confidentiality agreement on terms substantially similar to this Section. For purposes of the foregoing, confidential information shall mean all information respecting the Borrower, Guarantor, SunLink, or any of them, other than (i) information previously filed by the Borrower, Guarantor or SunLink with any governmental authority and available to the public, and (ii) information previously published in any public medium from a source other than, directly or indirectly, Lender. Use of information by counsel in enforcement proceedings after Default shall not constitute a prohibited disclosure of information under this section. |
15.15. |
Accuracy of Information . This Loan Agreement has been entered into by Lender based upon the information, data and representations furnished by Borrower to Lender, and Lenders obligation to close and fund the loan is subject to the continued accuracy of all matters submitted to Lender herewith. By acceptance hereof, Borrower warrants to Lender that all such information, data and representations heretofore and hereafter furnished to Lender are true and correct in all material respects, and there is contained therein no untrue statement of a material fact and this warranty shall be true at the time the Loan is closed and shall survive closing. There shall be no material change at the time the Mortgage Loan is closed of the income and expenses of the Property, the financial condition of Borrower and all other features of the transaction shall be in all material respects as represented by Borrower to Lender. |
15.16. |
Maximum Legal Rate of Interest . Notwithstanding any other provisions of this Loan Agreement or any of the Loan Documents to the contrary, the total interest charges incurred by Borrower pursuant to the Mortgage Note shall not exceed the maximum legal rate of interest under Oklahoma law. If the holder of the Mortgage Note shall ever be entitled to receive, collect or apply, as interest on the loans, any amount in excess of the maximum legal rate of interest permitted to be charged by applicable law, and, in the event any holder of the Mortgage Note ever receives, collects or applies, as interest, any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Mortgage Note, and if the principal balance is paid in full, any remaining excess shall be forthwith paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Borrower and Lender shall, to the maximum extent permitted, under applicable law: (a) characterize any non-principal payment as an expense, fee or premium rather than as interest; (b) exclude voluntary prepayments and the effects thereof; (c) spread the total amount of interest on the Mortgage Note throughout the entire term of the Mortgage Note so that the interest rate is uniform throughout the entire term of the Mortgage Note. |
15.17. |
No Responsibility of Lender . No acceptance or approval (if any) of the Plans and Specifications or any changes thereto by Lender or anyone acting on Lenders behalf, nor any acknowledgment by Lender or anyone acting on Lenders behalf, that the MOB have been developed or |
41
constructed in accordance with the Plans and Specifications, shall in any way be deemed an express or implied warranty or representation or approval by Lender or any one on behalf of Lender, that such improvements: (a) are or will be structurally sound, (b) are in good or workmanlike condition, repair or state of maintenance, (c) have any particular use or purpose, or (d) have any particular value, and Borrower hereby indemnifies and holds Lender harmless from any such claims that might be made by any party. Further, notwithstanding any term or provision of the Loan Documents, Lender shall not have any obligation or responsibility for the management, conduct or operation of the business and affairs of Borrower. No provision hereof or of any of the other Loan Documents shall be construed or interpreted to create any relationship between Borrower and Lender other than that of debtor and creditor. |
15.18. |
No Leasing or Drilling . Borrower shall not, without the prior written consent of Lender, permit any drilling or exploration for or extraction, removal or production of any mineral, natural element, compound or substance from the surface or subsurface of the Property regardless of the depth thereof or the method of mining or extraction thereof and agree to defend, indemnify, save and hold Lender, its officers, agents, servants, employees, successors and assigns harmless from any and all claims, liabilities, losses or expenses which may be incurred by Lender, and any and all other expenses or losses, either direct or consequential, which are attributable, or alleged in any way to be attributable, to the development and exploitation of mineral rights in, on or around the Property by Borrower or any other party. |
15.19. |
Notice of Title Protection . Lender is obtaining its own title protection in this transaction, and Borrower should seek competent advice as to whether Borrower should obtain any additional title protection to protect Borrower. |
15.20. |
Jurisdiction and Venue . Borrower hereby submits to the jurisdiction of any state or federal court located in Oklahoma County, Oklahoma, or Chickasaw County, Mississippi, as elected by Lender or required by applicable state law, in connection with any action or proceeding commenced for the collection, enforcement, or defense of this Loan Agreement, the Mortgage Note, the Deed of Trust, or any of the other Loan Documents, and hereby waives all objections to venue or any objections based on the theory of non-convenient forum in connection therewith. |
15.21. |
Counterparts . This Loan Agreement may be executed in two or more counterparts, each of which will be an original instrument, but all of which taken together will constitute one agreement. |
15.22. |
New Loan . The loan made by Lender to Borrower pursuant to the terms hereof and the execution of this Loan Agreement do not impose legal restrictions that will prevent Borrower from complying with 7 USC Section 1983(3) with respect to any loan obligations held or insured by the USDA, except for |
42
the prior written consent of Lender which consent will not be unreasonably withheld but which consent will be conditional on the satisfaction of all of Lenders underwriting and credit standards, and such other factors as are consistent with prudent banking practices. |
15.23. |
USDA Consent . Borrower and Lender hereby acknowledge and agree that any change, modification and/or consent negotiated between Borrower and Lender regarding any terms of this Loan Agreement will not be effective without the prior written consent of the USDA. |
15.24. |
Defined Terms . Capitalized terms defined herein shall have the same meaning in the Loan Documents unless otherwise defined therein. Certain defined terms are located in the Sections identified below: |
Term | Section | |
Affiliate |
10.17 | |
Assignment of Construction Contract |
4.5 | |
Assignment of Plans |
4.7 | |
Assignment of Rents |
4.2 | |
Borrower |
1 st Paragraph | |
Borrower Personal Property |
4.3 | |
Building Laws Indemnity |
10.34 | |
Building Permit |
11.2.8 | |
Business Days |
8.5 | |
Chatham |
7.21 | |
Chatham Credit Agreement |
7.21 | |
Conditional Commitment |
5.2 | |
Construction Budget |
11.2.5 | |
Construction Contract |
11.2.6 | |
Construction Escrow Account |
4.3 | |
Current Ratio |
10.37.3 | |
Debt to Tangible Net Worth Ratio |
10.37.2 | |
Deed of Trust |
4.1 | |
Default |
11.3 | |
Draw Request |
13 | |
EHR Payments |
2.3.2 | |
Environmental Indemnity |
10.33 | |
Filing Deadline |
10.4 | |
Financial Covenants |
10.7 | |
Financial Ratios Compliance Certificate |
10.7 | |
Funded Debt to EBITDA Ratio |
10.6.4 | |
GAAP |
6.5 | |
Guarantors |
5.1 | |
HIPAA |
10.15 | |
Historical Financial Statements |
6.5 |
43
Interest Rate |
2.2 | |
IRC |
10.4 | |
IRS |
10.4 | |
Lender |
1 st Paragraph | |
Lenders Inspector |
11.4 | |
Loan Agreement |
1 st Paragraph | |
Loan Commitment |
1 | |
Loan Documents |
7.1 | |
Maturity Date |
2.4 | |
MOB |
1 | |
Net Intercompany Funding |
10.6.2 | |
OFAC |
12.1.1 | |
Ordinary Affiliate Indebtedness |
10.26 | |
Permitted Contingent Liabilities |
10.23 | |
Permitted Encumbrances |
6.4 | |
Permitted Indebtedness |
10.26 | |
Plans and Specifications |
11.2.4 | |
Prepayment Premium |
2.3.3 | |
Prime Rate |
2.2 | |
Property |
1 | |
Retainage |
11.6 | |
SNB Security Agreement |
4.3 | |
SNDAs |
10.35 | |
Stock Certificates |
4.4 | |
Stock Pledge Agreement |
4.4 | |
Stock Power |
4.4 | |
Submission Deadline |
10.4 | |
SunLink |
Recitals | |
SunLink Guaranty |
5.1 | |
Term Loan |
Recitals | |
Title Insurer |
7.5 | |
USDA Guaranty |
Recitals | |
Working Capital Loan Agreement |
Recitals | |
Working Capital Note |
Recitals |
44
IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed as of the day and year first above written.
SOUTHERN HEALTH CORPORATION OF HOUSTON, INC., a Georgia corporation | ||
By: | ||
MARK J. STOCKSLAGER, Assistant Treasurer |
||
(the Borrower) |
STILLWATER NATIONAL BANK AND TRUST COMPANY | ||
By: | ||
Name: | ||
Title: | ||
(the Lender) |
45
Exhibit 10.27
WORKING CAPITAL LOAN AGREEMENT
by and between
SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.,
a Georgia corporation (Borrower)
and
STILLWATER NATIONAL BANK AND TRUST COMPANY (Lender)
TABLE OF CONTENTS
1. |
|
LENDING AGREEMENT |
1 | |||||||
2. |
|
BORROWERS NOTE |
1 | |||||||
2.1 |
Amount |
1 | ||||||||
2.2 |
Interest |
2 | ||||||||
2.3 |
Maturity |
2 | ||||||||
2.4 |
Payments |
2 | ||||||||
2.5 |
Borrowing Base |
2 | ||||||||
2.6 |
Revolving Loan |
3 | ||||||||
2.7 |
Borrowing Base Certificate |
3 | ||||||||
2.8 |
Advances |
3 | ||||||||
2.9 |
Loan Balancing |
4 | ||||||||
3. |
|
RECOURSE |
4 | |||||||
4. |
|
COLLATERAL SECURITY |
5 | |||||||
4.1 |
Deed of Trust |
5 | ||||||||
4.2 |
Assignment of Rents |
5 | ||||||||
4.3 |
Security Interest |
5 | ||||||||
4.4 |
Stock Pledge Agreement |
6 | ||||||||
5. |
|
GUARANTIES |
6 | |||||||
6. |
|
REPRESENTATIONS AND WARRANTIES |
6 | |||||||
6.1 |
Borrowers Existence |
6 | ||||||||
6.2 |
Litigation |
6 | ||||||||
6.3 |
No Default |
6 | ||||||||
6.4 |
Ownership |
6 | ||||||||
6.5 |
Financial Statements |
7 | ||||||||
6.6 |
Full Disclosure |
7 | ||||||||
6.7 |
Survival of Representations and Warranties |
7 | ||||||||
7. |
|
CONDITIONS PRECEDENT TO LOAN |
7 | |||||||
7.1 |
Loan Documents |
7 | ||||||||
7.2 |
Authority |
8 | ||||||||
7.3 |
Organization |
8 | ||||||||
7.4 |
Good Standing |
8 | ||||||||
7.5 |
Compliance with Governmental Regulations |
8 | ||||||||
7.6 |
Financial Statements |
8 | ||||||||
7.7 |
Tax Returns |
9 | ||||||||
7.8 |
Opinion of Borrowers Counsel |
9 | ||||||||
7.9 |
Licenses |
9 | ||||||||
7.10 |
No Prior Liens |
9 | ||||||||
7.11 |
Insurance |
9 | ||||||||
7.12 |
Releases |
9 | ||||||||
7.13 |
Chatham Subordination |
9 | ||||||||
8. |
|
INSURANCE |
9 | |||||||
8.1 |
Special Perils Insurance |
9 | ||||||||
8.2 |
Flood Insurance |
10 | ||||||||
8.3 |
Boiler and Machinery Insurance |
10 | ||||||||
8.4 |
Builders Risk Insurance |
10 | ||||||||
8.5 |
Business Interruption Insurance |
11 | ||||||||
8.6 |
Liability Insurance |
11 | ||||||||
8.7 |
Statutory Employees Insurance |
12 | ||||||||
8.8 |
Fidelity Bonds |
12 | ||||||||
8.9 |
Medical Malpractice Insurance |
12 | ||||||||
8.10 |
Documentation |
12 | ||||||||
8.11 |
Policy Requirements |
13 | ||||||||
8.12 |
Blanket Coverage |
13 | ||||||||
8.13 |
Protection of Lenders Interest |
13 | ||||||||
8.14 |
Lenders Rights; No Liability |
14 |
ii
iii
iv
WORKING CAPITAL LOAN AGREEMENT
THIS WORKING CAPITAL LOAN AGREEMENT (the Loan Agreement) is entered into effective this 5th day of July, 2012, (the Effective Date), by and between SOUTHERN HEALTH CORPORATION OF HOUSTON, INC., a Georgia corporation (Borrower) and STILLWATER NATIONAL BANK AND TRUST COMPANY (Lender).
RECITALS
WHEREAS, Borrower has requested that Lender extend certain credit and related financial accommodations including a loan of up to $1,000,000.00 for working capital and similar general corporate purposes evidenced by a revolving promissory note of even date herewith;
WHEREAS, Lender has agreed to accommodate the request from Borrower for the loan subject to the provisions of this Loan Agreement including the receipt of certain guaranties; and
WHEREAS, SunLink Healthcare, LLC, a Georgia limited liability company (Healthcare), and SunLink Health Systems, Inc., an Ohio corporation (SunLink), are each willing to separately guarantee 100% of the indebtedness and obligations of Borrower to Lender pursuant to their respective guaranties of even date herewith; and
WHEREAS, concurrently herewith Lender is also extending certain credit to Borrower pursuant to a separate Mortgage Loan Agreement for a loan of up to $9,975,000.00 in connection with mortgage refinancing and construction on real property owned by Borrower; and
NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, and other good and valuable consideration, the receipt and adequacy of which the parties hereto acknowledge, Borrower and Lender hereby agree as follows:
1. LENDING AGREEMENT . Subject to the terms and conditions hereinafter set forth, Lender agrees to lend to Borrower, and Borrower agrees to borrow from Lender the sum of up to ONE MILLION DOLLARS ($1,000,000.00) (the Loan Commitment), to be used by Borrower solely for the purposes of (a) refinancing certain existing indebtedness owing by Borrower, (b) providing working capital purposes in connection with Borrowers operation of its hospital, nursing home, clinic and medical office businesses on the Property (defined below), and (c) paying all fees and expenses required to be paid by Borrower hereunder.
2. BORROWERS NOTE . Borrower will execute and deliver to Lender a revolving promissory note of even date herewith in form and substance and payable on terms approved by Lender (the Working Capital Note) having the following terms:
2.1. |
Amount . The principal face amount will be ONE MILLION DOLLARS ($1,000,000.00). |
2.2. |
Interest . The Working Capital Note will bear interest at the interest rate equal to the greater of (a) six percent (6.0%) per annum; or (b) the Prime Rate plus one and one half percent (1.5%) per annum, which rate will be prospectively adjusted on September 30, 2012 and on the last day of every third month thereafter to reflect any change in the Prime Rate as in effect on such date (the Interest Rate). Prime Rate means the Prime Rate as published in the Money Rates Section of the Wall Street Journal , which rate is not necessarily the lowest rate of interest charged by Lender. All interest on the Working Capital Note shall be calculated for the actual number of days elapsed at a per diem charge based on a year consisting of 360 days. |
2.3. |
Maturity . The entire unpaid principal balance plus all accrued interest owing on the Working Capital Note shall be due and payable on July 5, 2014 (the Maturity Date). |
2.4. |
Payments . Commencing August 1, 2012 and on the 1st day of each month thereafter, monthly payments of interest only will be payable on the Working Capital Note at the Interest Rate. By instruction to the Lender, Borrower may authorize Lender to make an advance to pay interest on the date due. |
2.5. |
Borrowing Base . The unpaid principal balance of the Working Capital Note will not at any time exceed the lesser of (i) the Borrowing Base or (ii) $1,000,000.00. For purposes of this Loan Agreement, the term Borrowing Base will mean eighty percent (80%) of Eligible Accounts Receivable. The term Account will have the same meaning as such term is defined in the Uniform Commercial Code of the State of Oklahoma and will also include billed and unbilled Accounts. The term Eligible Accounts Receivable will mean all Accounts, except those Accounts (the Ineligible Accounts) which meet any of the following criteria at the time the Account comes into existence or prior to the date on which the Account is collected in full, (less the estimated contractual allowances resulting from reductions imposed by insurance companies and government payors as determined by Borrower and approved by Lender): (a) an Account which is more than one hundred twenty (120) days past due from the invoice date, provided that the aggregate amount of all Accounts which are more than ninety (90) days past due from the invoice date will be capped at $100,000.00 and all Accounts which exceed this aggregate amount will be deemed Ineligible Accounts; (b) Accounts of Account debtors disapproved by Lender, as reasonably determined by Lender; (c) private pay Accounts; (d) an Account which does not arise from a bona fide performance of services by Borrower; (e) any portion of an Account which is subject to or with respect to which Borrower has received notice of any claim, counterclaim, set-off, allowance or adjustment by the Account debtor, including without implied limitation, any claim, counterclaim, set-off, allowance or adjustment based on any violation of or failure to comply with any applicable federal or state law; (f) an Account which is subject to any attachment, levy, garnishment or other judicial process or subject to any assignment, claim, lien or security interest of any character; (g) an Account which does not arise in the ordinary course of Borrowers business; (h) an Account for which Borrower or Lender has received notice of bankruptcy, receivership, conservatorship, insolvency or material adverse change in the financial condition of the Account debtor; |
2
2.6. |
Revolving Loan . Borrower will be entitled to advance, repay and readvance funds under the Working Capital Note from time to time subject to the satisfaction of the conditions set forth in Section 7 hereof and the subsections thereunder, provided that the unpaid principal balance of the Working Capital Note will not at any time exceed the lesser of (i) the Borrowing Base or (ii) $1,000,000.00. Lender will not be obligated to make any advances under the Working Capital Note unless Lender has been provided with such written documentation as Lender may reasonably require to evidence that the loan proceeds thereunder are to be used solely for the purpose set forth at Section 1 hereof. |
2.7. |
Borrowing Base Certificate . Certificates in form satisfactory to Lender, along with an accounts receivable aging report will be provided to Lender by Borrower on or before the 20 th day of each month as of the last day of the immediately preceding month, and at such other times as may be required by Lender, which certificates shall show the computation of the Borrowing Base and be signed by an authorized representative of Borrower (the Borrowing Base Certificate). |
2.8. |
Advances . Subject to Section 7 hereof, advances under the Working Capital Note will be made by Lender from time to time on the request of Borrower subject to the following limitations: |
2.8.1. |
Advance Procedure . To obtain advances under the Working Capital Note, the Borrower will notify the Lender of the total amount of the requested advance, and will provide to the Lender a Borrowing Base Certificate, together with such additional documents and information as Lender reasonably may request with respect to the Advance. Any request by Borrower for an advance hereunder shall be in writing, or by telephone and in writing, and, unless waived by Lender, must be given so as to be received by Lender not later than noon (Oklahoma City time) on the requested advance Date. Each request for an advance hereunder shall be irrevocable and shall be deemed a representation by Borrower as of the date thereof and after giving effect to the requested advance the applicable conditions specified in Section 7 have been and will be satisfied, except for those conditions waived in writing by Lender with respect to such request. Each request for an advance hereunder shall specify (i) the requested advance date and (ii) the amount to be advanced. Lender may rely on any telephone request by a Senior Officer of Borrower or by Senior Officer of SunLink as agent for the Borrower for an Advance hereunder which it believes in good faith to be genuine ( provided that Borrower or SunLink as agent for Borrower shall also be required to promptly confirm to Lender each telephone request in writing); and Borrower hereby waives the right to dispute Lenders record of the terms of such telephone request. Senior Officer means as to Borrower its Chief Executive Officer, |
3
President, or Chief Financial Officer, and as to SunLink its Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Controller or any Executive Vice President. Borrower shall provide the Lender with a certificate as to the current names of such Senior Officers and any other person(s) who are authorized on behalf of Borrower to represent the Borrower in connection with a request for funds under the Working Capital Note. |
2.8.2. |
Disbursement . On Borrowers satisfaction of the requirements and conditions contained in this Loan Agreement, Lender will make available to Borrower the amount of the advance requested by remittance to the Operating Account or such other deposit account designated by Borrower from time to time in writing to Lender, not later than 4:00 p.m. (Atlanta, Georgia time) on the requested advance date. |
2.8.3. |
Records . Lender shall enter in its ledgers and records the amount of the advances made or distributed by Lender and the repayments made by Borrower thereon. All entries shall be made in accordance with customary accounting practices of Lender as in effect from time to time. The outstanding balance, as recorded on the most recent printout or other written statement of Lender shall, absent manifest error, be presumptive evidence of the amounts due and owing to Lender by Borrower; provided that any failure to so record or any error in so recording shall not limit or otherwise affect Borrowers duty to pay the Loan. Lender is authorized by Borrower to enter on a schedule attached to the Working Capital Note, as appropriate, a record of the advances and repayments; provided, however that the failure by Lender to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of Borrower hereunder and on the Working Capital Note, and, in all events, the principal amount owing by Borrower in respect of the Working Capital Note shall be the aggregate amount of all advances made by Lender less all payments of principal thereof made by Borrower. |
2.8.4. |
Termination of Advances . The Lender will have no obligation to make any advances under the Working Capital Note if a Default has occurred hereunder or under any of the Loan Documents. |
2.9. |
Loan Balancing . Borrower agrees that the unpaid principal balance of the Working Capital Note will not at any time exceed the lesser of (i) the Borrowing Base; or (ii) $1,000,000.00. If the unpaid principal balance of the Working Capital Note at any time exceeds such amounts as described above, Borrower agrees to make a principal payment in the amount necessary to reduce the unpaid principal balance of the Working Capital Note to comply with the terms of this Section 2.9, within five (5) days after Lenders request therefor. |
3. RECOURSE . The Loan Commitment will be full recourse to Borrower under the Working Capital Note, and full recourse to SunLink and Healthcare under their guaranties.
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4. COLLATERAL SECURITY . The performance of all covenants and agreements contained in this Loan Agreement and in the other documents executed or delivered as a part of this transaction and the payment of the Working Capital Note and all renewals, amendments and modifications thereof, all interest thereon and expenses of collection thereof shall be secured by the following:
4.1. |
Deed of Trust . Borrower shall grant Lender a second priority lien covering Borrowers real property described at Exhibit A hereto together with all buildings, fixtures and improvements now or hereafter located thereon (collectively, the Property) to be evidenced by a deed of trust in form and substance approved by Lender (the Deed of Trust). The lien covering the Property will be subordinate only to the lien granted by Borrower to Lender in the same collateral to secure the Mortgage Note. |
4.2. |
Assignment of Rents . Borrower shall grant Lender a second priority security interest in all of Borrowers leases and rents with respect to the Property pursuant to the terms of an assignment of leases and rents covering the Property in form and substance approved by Lender (the Assignment of Rents). The lien covering the leases and rents will be subordinate only to the lien granted by Borrower to Lender in the same collateral to secure the Mortgage Note. |
4.3. |
Security Interest . Borrower shall grant Lender (i) a first priority security interest covering all of Borrowers accounts, deposit accounts including but not limited to Account No. xxxxxx (the Medicare Account), and Account No. xxxxxx (the Operating Account), both maintained by Borrower with Lender, (all such accounts collectively, the Deposit Accounts) excluding Borrowers Account No. xxxxxx (the Construction Escrow Account) which shall be subject to a second priority security interest, (ii) a first priority security interest in Borrowers accounts receivable, government and non-government health care accounts receivable, including but not limited to health-care-insurance receivables, contract rights and inventory, whether now owned or hereafter acquired, and all proceeds, products, rents, profits, and income therefrom (collectively, the Receivables); (iii) a first priority security interest covering all of Borrowers goods, chattels, revenue, income, certificates of title, medical supplies, and equipment (collectively, the Goods) and (iv) a second priority security interest covering all of Borrowers medical equipment, furniture, hospital beds, kitchen equipment and supplies, computer equipment, computer hardware, computer software, computer software licenses, general intangibles, and all other tangible personal property, whether now owned or hereafter acquired, and all proceeds, products, rents, profits and income from the sale therefrom (the Equipment). The Deposit Accounts, the Receivables, the Goods and the Equipment are collectively referred to herein as the Borrowers Personal Property). The security interests granted shall be evidenced by one or more security agreements in form and substance approved by Lender (the Security Agreement). The lien covering the Equipment and the Construction Escrow Account will be subordinate only to the lien granted by Borrower to Lender in the same collateral to secure the Mortgage Note. |
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4.4. |
Stock Pledge Agreement . In support of the unlimited guaranty to be delivered by Healthcare, Healthcare shall pledge 100% of the stock and ownership interests in Borrower to Lender, to be evidenced by a Stock Pledge Agreement in form and substance approved by Lender (the Stock Pledge Agreement) and in connection therewith Healthcare shall deliver to Lender all original stock certificates (the Stock Certificates) together with a stock power endorsed in blank (the Stock Power). |
5. GUARANTIES . SunLink and Healthcare shall each guarantee payment of all indebtedness evidenced by the Working Capital Note, to be evidenced by guaranty agreements in form and substance approved by Lender (respectively, the SunLink Guaranty and the Healthcare Guaranty). SunLink and Healthcare are sometimes referred to hereafter together as the Guarantors.
6. REPRESENTATIONS AND WARRANTIES . Borrower represents and warrants that:
6.1. |
Borrowers Existence . Borrower is, and will continue to be a corporation, duly incorporated and validly existing under the laws of the State of Georgia; Borrower has adequate power, authority and legal right to own and hold the Property; Borrower is or will be, in all material respects, duly authorized, qualified and licensed under all applicable laws, regulations, ordinances and orders of public authorities which in any such case is material to the ability of Borrower to carry on its business in the development, construction, equipping, operating and leasing of the Property; Borrower has adequate authority, power and legal right to enter into and carry out the provisions of this Loan Agreement and other documents contemplated herein and to consummate the transactions contemplated hereby. |
6.2. |
Litigation . All litigation in which Borrower is involved is set forth on Schedule 6.2 hereto. There is no action, suit, proceeding or investigation pending or threatened against Borrower, or any of the owners of Borrower, which would reasonably be expected to materially adversely affect Borrower, the Property or any of Borrowers Personal Property or materially impair the ability of Borrower to carry on its business substantially as now conducted or contemplated or result in any substantial liability above applicable deductibles not adequately covered by insurance. |
6.3. |
No Default . The making and performance by Borrower of this Loan Agreement or the documents to be executed in connection herewith will not violate any material provision or constitute a material default under any indenture, agreement or instrument to which Borrower, the Property or any material portion of Borrowers Personal Property is bound or affected. |
6.4. |
Ownership . Borrower owns good marketable fee title to the Property, and Borrower has good title to Borrowers Personal Property and, upon completion of construction and/or installation and payment therefor, all of its other properties and assets, real or personal, tangible or intangible, which are or |
6
are to be constructed, owned, installed, or used in connection with any of the Property, and none of such properties or assets is or will be subject to any mortgage, deed of trust, pledge, security interest, encumbrance, lien or charge of any kind excluding only Permitted Encumbrances as set forth at Schedule 6.4 hereto. |
6.5. |
Financial Statements . Except as set forth on Schedule 6.5A hereto, Borrowers and Guarantors financial statements heretofore delivered to Lender (Historical Financial Statements) are true and correct in all material respects, have been prepared in accordance with United States generally accepted accounting principles consistently applied (except in the case of unaudited financial statements, subject to the absence of financial footnotes and to normal and recurring year-end adjustments that are not likely to be material in amount) (GAAP), and present in accordance with GAAP the financial condition reflected therein as of the times and for the respective periods referred to therein. For purposes of this Section 6.5, Historical Financial Statements means those financial statements set forth on Schedule 6.5B. |
6.6. |
Full Disclosure . Neither this Loan Agreement nor any statements or documents of Borrower referred to herein or delivered by Borrower pursuant to this Loan Agreement contains any untrue statement of a material fact. |
6.7. |
Survival of Representations and Warranties . All covenants, representations and warranties made herein and under all documents executed pursuant hereto shall survive the making of the loans hereunder and the delivery of the Working Capital Note and other instruments executed in connection therewith until complete repayment of the Working Capital Note and all renewals and modifications thereof. Each request by Borrower for an advance hereunder shall constitute an affirmation that the foregoing representations and warranties remain true and correct as of the date of such request, or if given as of a specific date, as of such date unless otherwise disclosed, except with respect to financial statements superseded by subsequent reporting to Lender. |
7. CONDITIONS PRECEDENT TO LOAN . As soon as all of the conditions set forth at Sections 7.1 through 7.12 hereof have been satisfied, and so long as no Default has occurred hereunder, Lender will advance the entire Loan Commitment from time to time, subject to the terms of this Loan Agreement, to be used solely for the purposes set forth in Section 1 hereof.
7.1. |
Loan Documents . This Loan Agreement, the Working Capital Note, the Deed of Trust, the Assignment of Rents, the Security Agreement, the Stock Pledge Agreement, the Stock Certificates, the Stock Power, the Account Collection Agreement, the SunLink Guaranty, the Healthcare Guaranty, and all other documents executed pursuant thereto or in connection therewith as might be required by Lender (all of the foregoing are referred to herein as the Loan Documents) shall have been duly authorized, executed and delivered to Lender. |
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7.2. |
Authority . A certificate of the Secretary or Assistant Secretary of Borrower, SunLink and Healthcare (or other appropriate officer, including in the case of Healthcare, its sole member) dated as of the Effective Date and certifying to the following: |
7.2.1. |
A true and correct copy of the corporate (or other) resolutions of such the applicable entity authorizing the execution, delivery and performance of the Loan Documents to which such entity is a party contemplated hereby and thereby; |
7.2.2. |
The incumbency, names, titles and signatures of the officers of such entity authorized to execute the Loan Documents to which such entity is a party. |
7.3. |
Organization . A certificate of the Secretary or Assistant Secretary of Borrower, SunLink and Healthcare (or other appropriate officer, including in the case of Healthcare, its sole member) dated as of the Effective Date and certifying to the following: |
7.3.1. |
A true and correct copy of the Articles of Incorporation or Certificate of Incorporation or Organization (or the equivalent) of each such entity with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of incorporation or organization as of a date not more than thirty (30) days prior to the Effective Date; and |
7.3.2. |
A true and correct copy of the bylaws (or other constitutive documents such as a limited liability company operating agreement) for the applicable entity. |
7.4. |
Good Standin g. A certificate of good standing for each of Borrower, SunLink and Healthcare in the jurisdiction of its incorporation or organization and, in the case of Borrower, its good standing as a foreign corporation in the State of Mississippi, in each case certified by the appropriate governmental officials as of a date not more than thirty (30) days prior to the Effective Date. |
7.5. |
Compliance with Governmental Regulations . Evidence to the satisfaction of Lender shall have been made available to Lender that (i) the Property complies in all material respects with all applicable zoning, subdivision, environmental, air quality, flood hazard, fire safety, planning, building and other governmental laws, ordinances, codes, regulations or private use restrictions to the extent any failure to do so would materially adversely affect the ability of Borrower to carry on its business substantially as presently conducted; (ii) Borrower holds all material licenses and permits required by law for Borrower to operate Borrowers hospital, nursing home and medical office businesses on the Property. |
7.6. |
Financial Statements . The financial statements of Borrower, SunLink and Healthcare as of the end of the most recent quarter shall have been delivered to Lender. |
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7.7. |
Tax returns . The filed federal income tax returns for the fiscal year ended June 30, 2011 for Borrower, SunLink and Healthcare shall have been delivered to and approved by Lender. |
7.8. |
Opinion of Borrowers Counsel . An opinion from Borrowers counsel in form and substance satisfactory to Lender shall have been delivered to Lender as to the due existence and good standing of Borrower, SunLink and Healthcare, and the due authorization of the execution and delivery of the Loan Documents, as applicable, by Borrower, SunLink and Healthcare. |
7.9. |
Licenses . Borrower shall have provided Lender with copies of all material licenses and permits required by law for Borrower to operate Trace Regional Hospital, Floy Dyer Manor Nursing Home, and the existing medical office businesses on the Property. |
7.10. |
No Prior Liens . Lender shall have been provided with written documentation satisfactory to Lender that no liens, other than those in favor of Lender and those included as Permitted Encumbrances, have been filed against the Property or Borrowers Personal Property. |
7.11. |
Insurance . Borrower shall have obtained all of the insurance as required by and in accordance with Section 8 hereof. |
7.12. |
Releases . Borrower shall have provided documentation satisfactory to Lender evidencing the complete release of Borrower from all personal liability owing under any other lending agreement, indebtedness or similar obligation owing to any party other than Lender in each case for money borrowed except in connection with Permitted Indebtedness (defined below). |
7.13. |
Chatham Subordination . Chatham Credit Management III, LLC, as agent (Chatham) with respect to the Amended and Restated Credit Agreement dated August 1, 2008 (as amended, restated or otherwise modified from time to time, the Chatham Credit Agreement) shall have delivered to Lender a subordination agreement in form and substance reasonably approved by Lender and Chatham. For the purpose of determining compliance with the provisions of Section 10.6 below, the subordinated indebtedness to Chatham under the Chatham Credit Agreement shall be disregarded. |
8. INSURANCE . Borrower shall obtain and maintain during the time stated below the following insurance policies and comply with the following obligations (those policies and obligations, collectively, the Required Insurance).
8.1. |
Special Perils Insurance . Borrower shall obtain and maintain at all times property insurance against all risks of loss to the Property customarily covered by All Risk or Special Perils Form policies as available in the insurance market (the Special Perils Insurance). Any Special Perils Insurance policy shall contain a coinsurance waiver and replacement cost value endorsement without reduction for depreciation. Special Perils Insurance shall cover at least the following perils: |
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8.1.1. |
Building collapse, fire, flood, impact of vehicles and aircraft, lightning, malicious mischief, mudslide, subsidence, vandalism, water damage, and windstorm; and |
8.1.2. |
Such other insurable perils as, under good insurance practices, other commercial property owners from time to time insure against for property and buildings similar to the Property in height, location, nature, type of construction, and use; and |
8.1.3. |
The additional expense of demolition and increased cost of construction including increased cost from any changes in laws on restoration (which may be subject to a sub-limit for demolition and increased cost of construction of up to $10,000,000); and |
8.1.4. |
At least one hundred percent (100%) of the replacement value of all buildings and improvements now or hereafter located on the Property (which may be subject to a margin clause of up to 115% limiting coverage for each item (building, personal property, etc.) of the value reported on the statement of value as provided by Borrower to the insurer); and |
8.1.5. |
All tenant improvements and betterments that any of the leases on the Property require Borrower to insure (the Insured Leasehold Property). |
8.2. |
Flood Insurance . If any buildings or improvements located on the Property are located in an area designated as flood prone or a special flood hazard area under the regulations for the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, 42 U.S.C. §4001 et seq., Borrower shall obtain and maintain at all times at least the maximum coverage for the Property available under the federal flood insurance plan which may be subject to a flood blanket sublimit of up to (i) $25,000,000 with respect to Trace Regional Hospital and (ii) $10,000,000 with respect to other locations. |
8.3. |
Boiler and Machinery Insurance . Borrower shall obtain and maintain at all times comprehensive boiler and machinery insurance covering all mechanical and electrical equipment against physical damage, rent loss, extra expense, and expediting expense on the Property and the Insured Leasehold Property (the Boiler and Machinery Insurance). The Boiler and Machinery Insurance shall be on a replacement cost value basis, and, for each accident, shall cover at least the greater of: (a) Fifteen percent (15%) of full replacement cost of the buildings and improvements now or hereafter located on the Property; or (b) $500,000.00. |
8.4. |
Builders Risk Insurance . Borrower shall obtain and maintain during construction of the MOB builders risk insurance for the full completed insurable value of the MOB written on a completed value |
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Form (100 percent non-reporting) or its equivalent and including an endorsement granting permission to occupy (the Builders Risk Insurance). The MOB is the medical office building as defined in the Mortgage Loan Agreement, the construction of which will be funded by the Mortgage Loan. Builders Risk Insurance shall cover: |
8.4.1. |
The same perils that Special Perils Insurance must cover with whatever limits and coverage extensions Lender requires, unless Borrowers Special Perils Insurance already includes that coverage; and |
8.4.2. |
Loss of materials, equipment, machinery, and supplies whether on-site, in transit, or stored offsite, or of any temporary structure, hoist, sidewalk, retaining wall, or underground property; and |
8.4.3. |
Soft costs, plans, specifications, blueprints, and models to the extent of $850,000.00; and |
8.4.4. |
Demolition and increased cost of construction, including increased costs arising from changes in laws at the time of restoration and coverage for operation of building laws, all subject to a sublimit satisfactory to Lender; and |
8.4.5. |
Business interruption (delayed opening) on an actual loss sustained basis and otherwise in compliance with Business Interruption Insurance requirements. |
8.5. |
Business Interruption Insurance . As an extension to Special Perils Insurance, Flood Insurance, and Boiler and Machinery Insurance, Borrower shall obtain and maintain business interruption insurance on an actual loss sustained basis (Business Interruption Insurance). Borrower shall obtain and maintain Business Interruption Insurance equal to at least $10,000,000.00. If a Default shall have occurred and then be continuing, after receipt of any Business Interruption Insurance proceeds, Lender will be entitled to apply any such proceeds to indebtedness then owing by Borrower to Lender under this Loan Agreement or the Mortgage Loan Agreement and within three (3) Business Days therewith will deposit any excess proceeds into Borrowers Operating Account. For purposes of this Loan Agreement, Business Day means any day other than (i) a Saturday or Sunday or (ii) a day on which federally chartered banking institutions are not required to be open. |
8.6. |
Liability Insurance . |
8.6.1. |
Borrower shall obtain and maintain the following insurance for personal injury, bodily injury, death, accident, and property damages (collectively, the Liability Insurance); |
(a) |
Public liability insurance, including commercial general liability insurance; |
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(b) |
Owned (if any), hired, and non-owned automobile liability insurance; and |
(c) |
Umbrella liability insurance. |
8.6.2. |
Liability Insurance shall provide coverage of at least one million dollars ($1,000,000.00) per occurrence and two million dollars ($2,000,000.00) in annual aggregate. If any Liability Insurance also covers other location(s) with a shared aggregate limit, the minimum Liability Insurance shall be increased by two million dollars ($2,000,000.00). |
8.6.3. |
Liability Insurance shall include coverage for liability arising from premises and operations, elevators, escalators, independent contractors, contractual liability (including liability assumed under any contracts and leases), and products and completed operations. Borrower will use commercially reasonable efforts to cause all Liability Insurance to name Lender as an Additional Insured by endorsement. |
8.7. |
Statutory Employees Insurance . Borrower shall obtain and maintain workers compensation and disability insurance as required by law (Statutory Employees Insurance). |
8.8. |
Fidelity Bonds . Borrower shall obtain fidelity bonds or employee dishonesty coverage for each employee of Borrower who has or will have access to any of Borrowers funds satisfactory to Lender. |
8.9. |
Medical Malpractice Insurance . Borrower shall obtain and maintain or cause to be maintained medical malpractice insurance for each medical professional employed by Borrower and Borrower shall use commercially reasonable efforts to require medical malpractice insurance to be maintained by each medical professional not employed by it working on the Property. |
8.10. |
Documentation . Borrower shall provide to Lender the following documentation: |
8.10.1. |
For Special Perils Insurance, Flood Insurance, and Boiler and Machinery Insurance, and Business Interruption Insurance (collectively, Property Insurance), Borrower shall cause Lender to be named as Lender Loss Payee or Mortgagee on a standard noncontributory mortgagee endorsement (or its equivalent) naming Lender or its designee as the party to receive insurance proceeds. |
8.10.2. |
Borrower shall provide such additional evidence of Lenders interest under any Required Insurance as Lender shall reasonably require from time to time, including the following (the Evidence of Insurance): |
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(a) |
An ACORD 28 certificate of insurance for all Property Insurance and Builders Risk Insurance; and |
(b) |
A certificate of insurance evidencing Borrowers Liability Insurance; and to the extent Borrower can cause the following by commercially reasonable efforts, such certificate will evidence Lender as an additional insured and otherwise reasonably evidence compliance with the Liability Insurance requirements of the Loan Documents. |
8.10.3. |
Borrower shall deliver to Lender, promptly upon issuance and in all events within ten (10) days of Borrowers receipt of the applicable policy, copies of the insurance policies for all Required Insurance, and will use commercially reasonable efforts to obtain a representation by the carrier or its authorized representative that such copy is true and correct. Prior to any policy expiration, Borrower shall deliver evidence of renewal in compliance with the Loan Documents. |
8.11. |
Policy Requirements . |
8.11.1. |
Borrower shall obtain all Required Insurance from domestic carrier(s) authorized to do business in the State of Mississippi and reasonably satisfactory to Lender with: (a) A claims paying ability of not less than A (or the equivalent) by S&P and one other rating agency satisfactory to Lender; and (b) A:X or better financial strength rating by AM Best. A change in carriers rating under clause (a) or clause (b) shall not constitute a Default so long as Borrower undertakes commercially reasonable efforts to obtain substitute coverage from a carrier rated under clause (a) or clause (b) as promptly as is commercially practicable, taking into account the remaining policy periods and the cost of such substitute coverage. |
8.12. |
Blanket Coverage . Borrower may provide any Required Insurance under a blanket policy or policies covering the Property and other property and assets, provided that: |
8.12.1. |
The blanket policy otherwise meets all requirements for Required Insurance, and, except in the case of Liability Insurance, specifies how much coverage, and which sublimits, apply exclusively to the Property; and |
8.12.2. |
The amount allocated to the Property equals or exceeds the Required Insurance. |
8.13. |
Protection of Lenders Interest . |
8.13.1. |
Borrower shall cause its insurance carrier to agree: |
(a) |
to provide Lender 30 days written notice (10 days prior written notice for nonpayment of premium) prior to any cancellation, termination or nonrenewal of the required insurance; |
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(b) |
to allow Lender to pay premiums to continue the policy upon notice of cancellation for nonpayment. |
8.13.2. |
Every Property Insurance policy shall by its terms remain valid and insure Lenders interest regardless of any: |
(a) |
Named insureds act, failure to act, negligence, or violation of warranties, declarations, or conditions; |
(b) |
Occupancy of use of the Property for purposes more hazardous than those permitted; or |
(c) |
Exercise of any Lenders remedies. |
If Lender reasonably deems itself insecure, on Lenders request, Borrower will be required to make monthly deposits for insurance premiums equal to one-twelfth (1/12) of the annual charges as estimated by Lender to accumulate with Lender sufficient funds to pay the insurance premiums thirty (30) days prior to their due date, such deposits to be held by Lender without interest.
8.14. |
Lenders Rights; No Liability . |
8.14.1. |
Borrower irrevocably authorizes Lender, at any time, to communicate directly with Borrowers insurance carrier(s), broker(s), and tenant(s) about any Required Insurance. |
8.14.2. |
Any determination or request that Lender makes about any Required Insurance shall impose no obligation or liability on Lender. Borrower shall not rely on any such determination or request (or its absence) as an implied or express representation about the adequacy of Borrowers insurance. Borrower acknowledges that any such determination or request would be made solely for Lenders own benefit and not for Borrower. Borrower retains sole responsibility for the adequacy and prudence of its insurance program. |
8.14.3. |
If at any time Lender has not received satisfactory written evidence that Borrower maintains and has paid for all Required Insurance, then without limiting Lenders remedies, Lender may (but shall have absolutely no obligation to) force place any Required Insurance or take such other actions as Lender shall deem appropriate to protect its interests. Prior to force placing insurance, Lender shall give notice to Borrower. Lenders costs of doing so shall constitute loans to Borrower, all of which Borrower agrees will be secured by the Loan Documents. |
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9. ACCOUNT COLLECTIONS . Pursuant to the Account Collections Agreement, Borrower will instruct all of Borrowers account debtors that (a) the point of remittance for payments remitted by any non-electronic means shall be [Borrower to designate address]; (b) the point of remittance for electronic payments remitted by non-Medicare account debtors shall be the Operating Account; and (c) the point of remittance for all electronically transmitted payments on accounts and accounts receivable of Borrower payable from any state or the federal government or any subdivision or agency thereof, including but not limited to Medicare and Medicaid payments (the Medicare Electronic Payments) shall be the Medicare Account. Borrower will not, without the prior written consent of Lender, revoke or alter the instructions until such time as all of the indebtedness owing by Borrower to Lender has been paid in full. Without limiting the foregoing, any payments received by Borrower other than as set forth above will be deposited or transferred within five (5) Business Days into the Operating Account. Payments received by Lender will be processed in accordance with the terms and conditions of the Account Collections Agreement. Borrower authorizes and directs Lender to sweep all funds from the Medicare Account to the Operating Account on a daily basis, and in the absence of a Default, such funds in the Operating Account may be used by Borrower, all in accordance with the terms of the Account Collections Agreement. Lender agrees that Lender will not have a right of set off with respect to the Medicare Account.
10. COVENANTS . Until payment in full of the Working Capital Note and all renewals and modifications thereof, and performance of all obligations owing to Lender under this Loan Agreement and the instruments executed pursuant hereto, unless Lender shall otherwise consent in writing, Borrower covenants and agrees as follows:
10.1. |
Performance of Obligations . Borrower will promptly and punctually perform all of the obligations hereunder and under the Loan Documents, and under all other instruments executed or delivered pursuant thereto. |
10.2. |
Information . Borrower will promptly furnish to Lender all reasonably requested information concerning the Property, the progress of the construction of the MOB and, the financial status of Borrower and updated budgets and disbursement schedules relating to the MOB. For each fiscal quarter, Borrower will provide Lender with a quarterly financial statement of Borrower (signed by an officer of Borrower charged with such responsibility) as having been prepared in accordance with GAAP within forty-five (45) days after the end of the fiscal quarter. For each fiscal year, Borrower will provide Lender with an annual financial statement of Borrower within one hundred five (105) days after the close of the fiscal year, certified by an officer charged with such responsibility as having been prepared in accordance with GAAP. If the date on which quarterly or annual financial statements would be due is not a Business Day, the date shall be extended to the next Business Day. The annual financial statements may be unaudited if Borrower is included within the consolidating statements of SunLinks audited annual financial statement. Borrower will provide Lender with such other financial reports as may be reasonably required by Lender. All financial statements will consist of at least a balance sheet, income statement, and statement of cash flow. Financial reports which are not financial statements shall be prepared in such form as are customarily utilized by management, including, if applicable, in accordance with GAAP or in such other form as may be reasonably required by Lender. |
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10.3. |
Guarantor Financial Statements . For each fiscal quarter, Borrower will cause SunLink and Healthcare to provide Lender with unaudited quarterly financial statements within forty-five (45) days after the end of the fiscal quarter. For each fiscal year, Borrower will cause SunLink and Healthcare to provide Lender with audited annual financial statements within one hundred five (105) days after the end of the fiscal year. If the date on which quarterly or annual SunLink or Healthcare financial statements would be due is not a Business Day, the date shall be extended to the next Business Day. Healthcares annual financial statements may be unaudited if Healthcare is included within the consolidating statements of SunLinks audited annual financial statements. All such financial statements will consist of at least a balance sheet, income statement and statement of cash flows. SunLinks financial statements will also include a statement of shareholders equity. All financial statements will be certified by an officer charged with such responsibility as having been prepared in accordance with GAAP. Borrower will cause SunLink and Healthcare to provide Lender with such other financial reports of SunLink and Healthcare as reasonably may be required by Lender. With respect to financial reports of SunLink or Healthcare that are not financial statements, such reports shall be prepared in such form as are customarily utilized by management, including, if applicable, in accordance with GAAP or in such other form as may be reasonably required by Lender. As to SunLink, SunLinks quarterly report on Form 10-Q and annual report on Form 10-K as required to be filed with the United States Securities and Exchange Commission shall be satisfactory as to form for SunLink Financial Statements and the filing thereof with the SEC via the EDGAR system shall constitute the provision thereof to Lender. |
10.4. |
Tax Returns . Borrower will cause to be provided to Lender copies of annual filed federal tax returns for Borrower, SunLink and Healthcare (or any consolidated return with respect to one or more of them) for each year on or before the Submission Deadline. Submission Deadline is defined as the date which is fifteen (15) days after the Filing Deadline. Filing Deadline is defined as the deadline for the filing of such tax returns established by the Internal Revenue Code (the IRC) for Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) for the immediately preceding calendar year. If Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) (i) timely files an application for an extension of the Filing Deadline with the Internal Revenue Service (IRS); (ii) timely pays any estimated tax liability and satisfies any other requirements established by the IRC in order to qualify for an extension of the Filing Deadline; and (iii) provides Lender with a copy of such filed application for an extension of the Filing Deadline, evidence of the payment of any estimated tax liability, and documentation satisfactory to Lender evidencing compliance with any other requirements of the IRC on or before the Submission Deadline, Borrower (or SunLink so long as Borrower is part of a SunLink consolidated group) will thereafter provide Lender with a copy of the filed tax return on or before the date which is |
16
fifteen (15) days after the extended Filing Deadline. Borrower hereby represents, warrants, covenants and affirms to Lender that all tax returns now or hereafter provided by Borrower, SunLink and Healthcare to Lender are and will be true and correct copies of the original tax returns filed with the IRS. The delivery by Borrower, SunLink and Healthcare of each tax return to Lender shall constitute a reaffirmation that such tax return is a true and correct copy of the original tax return filed with the IRS. |
10.5. |
Accounts Receivable Reports . Commencing on July 20, 2012 and on the 20 th day of each month thereafter, so long as Borrower has a security interest in the Receivables, Borrower will provide Lender with a monthly accounts receivable report for Borrower for the immediately preceding calendar month. |
10.6. |
Financial Covenants . |
10.6.1. |
Debt Service Coverage Ratio . Borrower will maintain a Debt Service Coverage Ratio of at least 2.85 to 1.00 during the term of the Working Capital Note and all renewals and modifications thereof. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. Debt Service Coverage Ratio means (i) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less incentive payments received by Borrower pursuant to the Health Information Technology for Economic and Clinical Act of 2009, 42 U.S.C. § 1395ww(n), 42 C.F.R. § 495.104, et seq. , 75 FED. REG. 44314, (EHR Payments), all for the immediately preceding one (1) fiscal quarter, divided by (ii) Borrowers scheduled principal payments on term debt, plus scheduled capital lease payments, for the succeeding one (1) fiscal quarter plus interest expense for the immediately preceding one (1) fiscal quarter. The number of fiscal quarters used in each component of the ratio shall increase by one (1) for each subsequent testing period, up to a maximum of four (4) fiscal quarters, at which time the Debt Service Coverage Ratio shall thereafter be tested on a four quarter basis. |
10.6.2. |
Fixed Charge Coverage Ratio . Borrower will maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00 during the term of the Working Capital Note and all renewals and modifications thereof. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. The term Fixed Charge Coverage Ratio means (i) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less EHR payments, all for the immediately preceding one (1) fiscal quarter, divided by (ii) Borrowers scheduled principal payments on term debt and scheduled capital lease payments for the succeeding one (1) fiscal quarter, plus interest expense, plus distributions to Healthcare and Net Intercompany Funding (excluding distributions and intercompany funding from EHR Payments), all for the preceding one (1) |
17
fiscal quarter. The number of fiscal quarters used in each component of the ratio shall increase by one (1) for each subsequent testing period, up to a maximum of four (4) fiscal quarters at which time the Fixed Charge Coverage Ratio shall thereafter be tested on a four fiscal quarter basis. Net Intercompany Funding means (x) the change in receivable from Affiliate during the test period less (y) the change in payables to Affiliate (excluding changes in Ordinary Affiliate Indebtedness) during the test period. |
10.6.3. |
Liquidity . Days Cash on Hand means (i) Borrowers unrestricted cash assets reported on Borrowers balance sheet plus the balance available to be advanced to Borrower under the Working Capital Note as of the test date divided by (ii) Borrowers operating expenses, excluding depreciation and bad debt expense, for the immediately preceding four (4) quarters divided by 365. Liquidity will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. For the test dates listed below, Borrower must have a minimum Days Cash on Hand as indicated below: |
Test Dates |
Minimum
Days Cash On Hand |
|||
9/30/12 |
10 | |||
12/31/12 |
15 | |||
3/31/13 and thereafter |
20 |
10.6.4. |
Funded Debt to EBITDA Ratio . Funded Debt to EBITDA Ratio means (i) the aggregate outstanding balances of all capital leases and all interest-bearing and non-interest-bearing notes payable, as of the test date divided by (ii) Borrowers net earnings, plus interest expense, plus depreciation expense, plus amortization expense, plus income tax expense, less EHR payments, all for the immediately preceding four (4) quarters,. The ratio will be tested quarterly commencing with the fiscal quarter ending September 30, 2012 and subsequently as of the last day of every third month thereafter. For the test dates listed below, the Funded Debt to EBITDA Ratio shall not exceed the maximum indicated: |
Test Dates |
Maximum
Funded Debt to EBITDA Ratio |
|
9/30/12 3/31/17 |
3.5 to 1 | |
6/30/17 3/31/22 |
3.25 to 1 | |
6/30/22 and thereafter |
3.0 to 1 |
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10.7. |
Financial Ratios Compliance Certificate . Borrower will provide Lender with a Compliance Certificate in the form attached hereto as Schedule 10.7 (a Financial Ratios Compliance Certificate) together with all other documentation as requested by Lender commencing November 15, 2012 and on the fifteenth (15 th ) day of every third month thereafter reflecting Borrowers computation of the Debt Service Coverage Ratio, the Fixed Charge Coverage Ratio, the number of Days Cash on Hand, and the Funded Debt to EBITDA Ratio (the Financial Covenants) for the immediately preceding applicable periods. |
10.8. |
Litigation . Borrower will promptly furnish to Lender written notice of any litigation: in which Borrower is involved which may reasonably be expected to materially adversely affect (i) the ability of Borrower to perform its obligations under the Loan Documents or (ii) the Property or which relates to construction of the MOB. |
10.9. |
[Intentionally Omitted.]. |
10.10. |
No Liens . Borrower shall not create, assume or suffer to exist any mortgage, deed of trust, pledge, lien, charge, encumbrance, or security interest on any of the Property or any of Borrowers Personal Property, excluding only encumbrances in favor of Lender and Permitted Encumbrances. |
10.11. |
Use of Loan Proceeds . Borrower shall not permit any funds advanced to Borrower under this Loan Agreement to be used for any purpose other than those purposes described in Section 1. |
10.12. |
Estoppel Certificates . On request by Lender, either verbally or in writing, Borrower shall furnish promptly a written statement or affidavit, in such form as shall be satisfactory to Lender, stating the unpaid balance of the Working Capital Note and that there are no known offsets or defenses against full payment of the Working Capital Note, or if there are such offsets and defenses, specifying the same. |
10.13. |
Payment of Taxes . All taxes, assessments and governmental charges or levies imposed on Borrower or on Borrowers assets, income or profits will be paid prior to the date on which penalties attach thereto unless being contested in good faith and by appropriate procedures. If Lender reasonably deems itself insecure, on Lenders request, Borrower will be required to make monthly deposits for real estate taxes, assessments and similar charges equal to one-twelfth (12) of the annual charges estimated by Lender or accumulate authorized funds with Lender to pay such impositions thirty (30) days prior to their due dates, such deposits to be held by Lender in a non-interest bearing account. |
10.14. |
Books and Records . Borrower will keep and maintain adequate and proper books and records of accounts in regard to Borrowers hospital, nursing home, medical office and related businesses located on the Property, which books and records shall be sufficient in all material respects to allow the preparation of the Financial Statements in accordance with GAAP. |
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10.15. |
Lenders Access . Borrower shall permit any person designated by Lender, including but not limited to Lenders Inspector, to, in the absence of a Default, upon 48 hours prior written notice (which may be given by e-mail), and during normal business hours (i) visit and inspect any of the properties, books and financial records of Borrower, (ii) enter upon the Property, including the MOB during and after construction, including to inspect the construction progress of the MOB and all materials to be used in the construction of the MOB and to examine the current Plans and Specifications; (iii) examine and to make copies of the books of accounts and other financial records of Borrower, and (iv) discuss the affairs, finances and accounts of Borrower with, and to be advised as to the same by, its officers. Such inspections may occur no more often than once per fiscal quarter so long as no Default exists, provided, however, that during construction of the MOB, Lenders Inspector may conduct such inspections with respect to construction of the MOB at such times and intervals and with such notice as Lender or Lenders Inspector reasonably deems appropriate. Lender (or its designee) may conduct audits, at Lenders cost and expense, of Borrowers books of account, records or other papers relating to the collateral no more frequently than once each quarter unless a Default exists. Each inspection, visit, audit, examination, or reproduction of books and records or extracts thereof shall be subject to and conducted in accordance with applicable law, including all healthcare rules and regulations, including but not limited to the Health Insurance Portability and Accountability Act (HIPAA) and confidentiality of patient information. Without limiting the foregoing, the aforementioned limitations on the frequency of and payments of costs and expenses associated with visits, inspections and/or audits and any notice requirements shall cease to be applicable when any Default exists and shall not constitute a limitation on or a waiver of the rights of the USDA under applicable law. |
10.16. |
[Intentionally Omitted.]. |
10.17. |
No Merger . Borrower will not merge into or with or consolidate with any corporation, partnership, limited liability company, or other legal entity other than a merger or consolidation (i) as to which Lender shall have been given prior written notice, (ii) in which an Affiliate of SunLink is merged into or with or consolidated with Borrower where Borrower is the survivor and immediately thereafter and after giving effect thereto Borrower is in compliance with Section 10.6, and (iii) no Default shall have occurred and then be continuing. For purposes of this Loan Agreement, Affiliate with respect to Borrower means (i) SunLink, Healthcare and any entity controlled directly or indirectly by SunLink or Healthcare; (ii) any entity controlled directly or indirectly by Borrower; (iii) any entity that directly, or indirectly through one or more intermediaries, subsequently controls Borrower (a Controlling Person); or (iv) any entity which is controlled by or is under common control with a Controlling Person. As used herein, the term control of an entity means the possession, directly or indirectly, of the power: (A) to vote 50% or more of the voting securities of such entity (on a fully diluted basis) having ordinary power to vote in the election of the governing body of such entity or (B) to direct or cause the direction of the management or policies of an entity, whether through the ownership of voting securities, by contract, or otherwise. |
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10.18. |
No Sale . Borrower will not sell, lease or convey all or any portion of the Property, or all or any portion of Borrowers Personal Property, without the advance written consent of the Bank (such consent not to be unreasonably withheld or delayed); provided, however, that no advance written consent shall be necessary if no Default then exists or if such sale, lease or conveyance consists of (i) the sale of inventory in the ordinary course of business, (ii) the transfer or sale of equipment in connection with the replacement of such equipment with new equipment of a similar type and value, or (iii) leases made in the ordinary course of business, including but not limited to leases of the MOB or portions thereof; it being expressly anticipated that Borrower may in the future lease certain portions of the improvements situated on the Property including the MOB to third parties, in which instance Borrower shall provide copies of such leases to Lender. |
10.19. |
Business Restrictions . Borrower will not engage in any business other than the ownership and operation of hospital, nursing home, clinic and medical offices located on the Property and the provision of services related thereto and activities ancillary thereto. |
10.20. |
[Intentionally Omitted.]. |
10.21. |
Other Information . Borrower agrees to furnish to Lender such other information concerning the business activities of Borrower, the Property and Borrowers Personal Property as Lender might reasonably request. |
10.22. |
Inspections . Subject to applicable law, including all healthcare rules and regulations, including but not limited to HIPAA and confidentiality of patient information, Borrower will provide Lender with the results of all inspections of the Property or hospital or nursing home operations, conducted by any local, state or federal regulatory, licensing or safety agency or entity. Such results will be provided to Lender within ten (10) days after the end of each calendar quarter. |
10.23. |
Contingent Liabilities . Contingent Liabilities . Except with respect to Permitted Contingent Liabilities as set forth in Schedule 10.23 hereto (Permitted Contingent Liabilities), Borrower will not assume, guarantee, endorse or otherwise become contingently liable for the obligation of any other person, firm or corporation. |
10.24. |
Other Agreements . Borrower will not enter into any agreement or do any act which reasonably would be expected to cause Borrower to be unable to comply with the terms of the Loan Documents. |
10.25. |
Additional Documents . Borrower agrees to execute and deliver any documents which are necessary in the reasonable judgment of Lender to obtain, maintain and perfect the liens and security interests intended to be created by the Loan Documents or, at Lenders expense, to enable Lender to comply with any federal or state law otherwise applicable to Lender. |
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10.26. |
Other Indebtedness . Except for the indebtedness identified in Schedule 10.26A hereto (the Permitted Indebtedness), Borrower will not incur any other indebtedness for money borrowed, capital lease obligations or obligations for the deferred purchase of property to any party other than Lender, except in the ordinary course of Borrowers business, without the prior written consent of Lender. Except for indebtedness identified on Schedule 10.26B hereto (Ordinary Affiliate Indebtedness), indebtedness or liabilities to affiliates of Borrower, including charges of insurance, accounting and other shared costs, shall not be considered to be in the ordinary course of Borrowers business. So long as no Default has occurred and is continuing, Borrower may also make intercompany periodic cash management transfers to and from Affiliates if such transfers are properly accounted for in determining distributions and Net Intercompany Funding for the purposes of Section 10.6 above. |
10.27. |
Bank Accounts . So long as any indebtedness is owing by Borrower to Lender, Borrower will maintain with Lender all of Borrowers bank accounts, including without limitation the Operating Account, and the Medicare Account; provided, however, that Borrower may maintain (i) a local bank account(s) in Houston, Mississippi into which checks, cash payments and negotiable instruments may be deposited which will be swept weekly into one of Borrowers bank accounts with Lender and (ii) the Medicare Account may be maintained at Borrowers current bank until authorization to change such account to Lender is obtained from Medicare. |
10.28. |
Management Fees . Borrower shall pay no fees for management or similar services to any party, including but not limited to SunLink, Healthcare, or any other affiliate, parent or subsidiary of Borrower except for management fees set forth on Schedule 10.28 hereto (Permitted Affiliate Management Fees). After the occurrence and during the continuance of a Default, Borrower will not pay any Permitted Affiliate Management Fees provided that this section shall not prohibit Borrower from paying Ordinary Affiliate Indebtedness. |
10.29. |
Intercompany Loans; Dividends . Borrower will not make any distributions, loans or advances of any kind to any party or make or declare any dividend during the term of the Working Capital Note and all renewals and modifications thereof except that Borrower may: (i) make intercompany loans to SunLink and/or Healthcare so long as after making any such loan and giving effect thereto Borrower is otherwise in compliance with Section 10.6 above; (ii) declare and pay cash dividends if: (x) at the date of declaration no Default shall have occurred and be continuing and the net amount of dividends declared and made for the period from July 1, 2012 and ending on the computation date in question shall not exceed eighty percent (80%) of the net income of Borrower for the period from July 1, 2012 to such computation date (minus the case of a deficit, the net deficit of Borrower for such period); (y) Borrower shall have had positive net income after taxes for the fiscal year preceding the year in which any |
22
such dividend is proposed to be declared or paid; and (z) after giving effect to the declaration and payment of any such dividend, Borrower shall be in compliance with Section 10.6 above; (iii) pay or make distributions for Permitted Affiliate Management Fees; (iv) pay or make distributions for Ordinary Affiliate Indebtedness; and (v) pay or make distributions for Permitted Contingent Liabilities. |
10.30. |
Equal Employment Opportunity . All construction contracts relating to the Property will comply with Executive Order 11246 entitled Equal Employment Opportunity as amended and as supplemented by applicable Department of Labor regulations, debarment requirements of 7 CFR part 3017, and the Copeland Anti-Kickback Act (18 U.S.C. §874). |
10.31. |
Current Ratio . Commencing September 30, 2012 and tested as of the last day of every third month thereafter, Borrower will maintain a Current Ratio of at least 1.00 to 1.00 during the term of the Working Capital Note and all renewals and modifications thereof. Current Ratio means the current assets of Borrower divided by the current liabilities of Borrower computed in accordance with GAAP. |
11. COVENANT ADJUSTMENT . Notwithstanding anything set forth in Section 10 above, the covenants set forth therein shall at no time be more restrictive than those set forth in Section 10 of the Mortgage Loan Agreement.
12. ANTI-MONEY LAUNDERING AND INTERNATIONAL TRADE CONTROLS .
12.1. |
Compliance with International Trade Control Laws and OFAC Regulations . Borrower represents, warrants and covenants to Lender that: |
12.1.1. |
Borrower is not now nor shall Borrower be at any time until after the Working Capital Note, and all renewals and modifications thereof, is fully repaid a person with whom a U.S. person, including a financial institution, is prohibited from transacting business of the type contemplated by this Loan Agreement, whether such prohibition arises under U.S. law, regulation, executive orders or lists published by the Office of Foreign Assets Control (OFAC) of the Department of the Treasury of the United States of America (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise; |
12.1.2. |
None of Borrower, Healthcare, SunLink, any person after the Effective Date who owns a direct interest in Borrower or any person after the Effective Date who controls any person who owns a direct or indirect interest in Borrower is now or shall be at any time until after the Working Capital Note, and all renewals and modifications thereof, is fully repaid a person with whom a U.S. person, including a financial institution, is prohibited from transacting |
23
business of the type contemplated by this Loan Agreement, whether such prohibition arises under U.S. law, regulation, executive orders or lists published by the OFAC (including those executive orders and lists published by OFAC with respect to Specially Designated Nationals and Blocked Persons) or otherwise. |
12.2. |
Borrowers Funds . Borrower represents, warrants and covenants to Lender that: |
12.2.1. |
Borrower has taken, and shall continue to take until after the Working Capital Note, and all renewals and modifications thereof, is fully repaid, such measures as are required by applicable law to verify that the funds invested in Borrower are derived (a) from transactions that do not violate U.S. law nor, to the extent such funds originate outside the United States, do not violate the applicable laws of the jurisdiction in which they originated; and (b) from permissible sources under U.S. law and to the extent such funds originate outside the United States, under the laws of the jurisdiction in which they originated; |
12.2.2. |
None of Borrower, Healthcare, SunLink, any person after the Effective Date who owns a direct interest in Borrower, or any person after the Effective Date who controls any person who owns a direct or indirect interest in Borrower, or, to Borrowers knowledge, any person providing funds to Borrower (a) is under investigation by any governmental authority for, or has been charged with, or convicted of, money laundering, drug trafficking, terrorist-related activities, any crimes which in the United States would be predicate crimes to money laundering, or any violation of any state or federal anti-money laundering laws; (b) has been assessed civil or criminal penalties under any state or federal anti-money laundering laws; and (c) has had any of its/his/her funds seized or forfeited in any action under any state or federal anti-money laundering laws; |
12.2.3. |
Borrower shall make payments on the loan evidenced by the Loan Documents using funds invested in Borrower, donations and pledges, grants, operating revenues or insurance proceeds unless otherwise agreed to by Lender; |
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12.2.4. |
As of the Effective Date and at all times during the term of the Working Capital Note and all renewals and modifications thereof, all operating revenues are and will be derived from lawful business activities of Borrower or Borrowers tenants or other permissible sources under U.S. law; and |
12.2.5. |
On the Maturity Date, Borrower will take all necessary steps to verify that funds used to repay the Working Capital Note in full (whether in connection with a refinancing, asset sale or otherwise) are from sources permissible under U.S. law and to the extent such funds originate outside the United States, permissible under the applicable laws of the jurisdiction in which they originated. |
13. DEFAULT . Each of the following shall constitute a default hereunder and under each of the Loan Documents (Default):
13.1. |
Nonpayment of Notes . Failure to make payment when due of any interest on or principal of the Working Capital Note or the Mortgage Note, or any renewals or modifications thereof and such failure shall continue for a period of three (3) Business Days or more after the date due; or |
13.2. |
Mortgage Loan Agreement Default . The occurrence and continuance of any Default (as defined therein) under that certain Mortgage Loan Agreement (as defined therein) of even date herewith signed by Borrower and Lender in connection with the Mortgage Note; or |
13.3. |
Chatham Credit Agreement Default . The occurrence of any Event of Default (as defined therein) under the Chatham Credit Agreement which shall have occurred and then be continuing.; or |
13.4. |
Other Nonpayment . Failure to make payment when due of any other amount payable under the terms of this Loan Agreement or any of the Loan Documents within five (5) Business Days of the receipt of written demand therefor from Lender (unless the same or amount thereof is being contested in good faith by Borrower); or |
13.5. |
Breach of Covenants . Breach by Borrower in the performance or observance of any covenant made under this Loan Agreement or any of the Loan Documents, or under the terms of any other instrument delivered to Lender in connection with this Loan Agreement, provided that with respect to any such covenants which are non-monetary in nature, Borrower will have thirty (30) days following receipt of written notice from Lender to Borrower to cure the breach of such covenant before such occurrence will constitute a Default hereunder; or |
13.6. |
Creation of Liens . The creation or enforcement of any lien, deed of trust, pledge, security interest, encumbrances or other lien (including a lien of attachment, judgment or execution) securing a charge or obligation affecting any or all of the Property or all or any of Borrowers Personal Property, excepting Permitted Encumbrances which continues more than thirty (30) days following receipt of written notice from Lender; or |
25
13.7. |
Change of Ownership . Except as permitted in Section 10.18, the assignment, sale, transfer, encumbrance or conveyance of all or any portion of the Property not otherwise permitted by the Loan Documents without the prior written consent of Lender, or if the ownership of the Property becomes vested in a person or entity other than Borrower without the prior written consent of Lender, or if there is a change in control of Borrower from Guarantor or any other wholly-owned subsidiary of SunLink which shall guarantee the obligations of Borrower under the Loan Agreement without Lenders prior written consent; or |
13.8. |
Liquidation or Disposition of Assets . The liquidation or dissolution of Borrower or Borrower entering into any partnership, joint venture, syndicate, pool, operating agreement, or other combination with respect to all of the operations of Borrowers hospital or nursing home whether in a single transaction or a series of related transactions or the assets or properties of Borrower substantially as an entirety, or except in the ordinary course of business (including with respect to the disposition of used or obsolete Equipment), the conveyance, sale, assignment or lease of any material part of the assets or business of Borrower, except in all such cases as otherwise provided by this Loan Agreement (including Sections 10.17 and 10.18), without the prior written consent of Lender; or |
13.9. |
Judgment . Entry by any court of final, non-appealable judgment (and the expiration of all appeals) against Borrower and not covered by insurance in excess of $100,000.00, or an attachment of any property of Borrower which is not discharged to the reasonable satisfaction of Lender within sixty (60) days thereof; or |
13.10. |
Casualty Loss; Condemnation . Substantial damage or destruction by casualty or taking by rights of eminent domain of all or any substantial portion of the Property so as to materially and adversely affect Borrowers ability to perform Borrowers obligations hereunder; or |
13.11. |
[Intentionally Omitted.]. |
13.12. |
[Intentionally Omitted.]. |
13.13. |
Bankruptcy . The occurrence of any of the following: (i) the institution of bankruptcy reorganization, liquidation or receivership proceedings by or against Borrower, SunLink or Healthcare or any parent of Borrower, or any controlled affiliate or subsidiary of Borrower which are not dismissed within sixty (60) days after the filing thereof, or (ii) the making of any assignment for the benefit of creditors by or against Borrower, SunLink or Healthcare or any parent of Borrower, or any controlled affiliate or subsidiary of Borrower, or (iii) if Borrower, SunLink or Healthcare or any parent of Borrower, or |
26
any controlled affiliate or subsidiary of Borrower becomes insolvent, or (iv) any admission by Borrower, SunLink or Healthcare or any parent of Borrower, or any controlled affiliate or subsidiary of Borrower of its or their inability to pay debts as such debts mature; or |
13.14. |
Termination of Existence . Borrower ceases to be a validly existing Georgia corporation; or |
13.15. |
Governmental Requirements . The issuance of any order, decree or judgment pursuant to any judicial or administrative proceeding declaring that the Property, the MOB, the construction of the MOB, or the operation of the Property (including the MOB) is in material violation of any federal, state or local law, ordinance, rule or regulation which in any such case would materially adversely affect Borrowers business; or |
13.16. |
Representations . Any representation, warranty, statement, certificate, schedule or report made or furnished to Lender by Borrower proves to be false or erroneous in any material respect at the time of the making thereof, and Borrower fails to take or cause to be taken corrective measures with respect to such representations or warranties satisfactory to Lender within thirty (30) days after written notice by Lender, and such corrective measures are not completed to Lenders satisfaction within sixty (60) days after such written notice is given; or |
13.17. |
Loan Documents . Any of the Loan Documents cease to be valid, legally binding or enforceable which renders such documents inadequate for the realization of the material benefits intended to be provided thereby; or |
13.18. |
Revocation of Authorization . (i) The revocation by Borrower of any of the authorizations contained in the Account Collection Agreement to sweep daily all funds contained in the Medicare Account into the Operating Account; or (ii) the revocation or modification of any authorization or instruction to any of Borrowers account debtors in a manner inconsistent with the Account Collection Agreement (Lender agrees that it must honor any such revocation by Borrower described in this Section 13.18 notwithstanding the fact that any such revocation constitutes a Default hereunder); or |
13.19. |
Loss of Licenses . The suspension or termination of any of Borrowers licenses or permits which are required by law and which suspension or termination would materially adversely affect Borrowers ability to operate Borrowers hospital, nursing home, medical offices and related businesses on the Property substantially as presently conducted; or |
27
14. REMEDIES . On the occurrence of a Default, as defined in Section 13 of this Loan Agreement, Lender may, at its option:
14.1. |
Acceleration of Note . Terminate making advances under the Working Capital Note, and the Loan Documents, and declare the Working Capital Note or any renewals or modifications thereof to be immediately due and payable whereupon the Working Capital Note or any renewals or modifications thereof shall become forthwith due and payable without presentment, demand, protest or notice of any kind, and Lender shall be entitled to proceed simultaneously or selectively and successively to enforce its rights under the Working Capital Note, the Deed of Trust, this Loan Agreement, and any or all of the Loan Documents, and any of the instruments executed pursuant to the terms thereof, or in connection therewith to evidence or secure the obligations of Borrower, and all renewals and modifications thereof. Nothing contained herein shall limit Lenders rights and remedies available under applicable law. |
14.2. |
Selective Enforcement . In the event Lender shall elect to selectively and successively enforce its rights under any of the Loan Documents, such action shall not be deemed a waiver or discharge of any other lien, encumbrance or security instrument securing payment of the Working Capital Note until such time as Lender shall have been paid in full all sums advanced under the Working Capital Note. The foreclosure of any lien provided pursuant to the terms of the Loan Documents without the simultaneous foreclosure of all such liens shall not merge the liens granted which are not foreclosed with any interest that Lender might obtain as a result of such selective and successive foreclosure. |
14.3. |
Cumulative Remedies . The rights and remedies of Lender provided by the Loan Documents are cumulative and no right or remedy will be exclusive of any other or of any other right or remedy which Lender might otherwise have by virtue of the occurrence of a Default and the exercise of any right or remedy by Lender will not impair Lenders standing to exercise any other right or remedy. |
14.4. |
Deposits; Setoff . Regardless of the adequacy of Borrowers Personal Property, any deposits or other sums credited by or due from Lender to Borrower under this Loan Agreement or the Mortgage Loan Agreement , will at all times constitute collateral security for all obligations of Borrower to Lender under this Loan Agreement or the Mortgage Loan Agreement, and, except with respect to funds in the Medicare Account, which Lender agrees are not subject to set off, may be set off against any and all liabilities, direct or indirect, absolute or contingent, now existing or hereafter arising, of Borrower to Lender under this Loan Agreement or the Mortgage Agreement. The rights granted by this paragraph will be in addition to the rights of Lender under any statutory bankers lien. |
14.5. |
Appointment of Receiver . Lender will be entitled to obtain a court appointed receiver for the Property without notice to Borrower, SunLink or Healthcare, which notice is hereby waived. |
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15. MISCELLANEOUS . It is further agreed as follows:
15.1. |
[Intentionally Omitted] . |
15.2. |
Expenses . Whether or not advances under this Loan Agreement are actually made, Borrower agrees to pay all fees, expenses and charges in respect to the loan contemplated by this Loan Agreement and the Loan Documents, including, without limiting the generality thereof, the following: |
15.2.1. |
the reasonable fees and out of pocket expenses of legal counsel employed by Lender in connection with the negotiation and preparation of the Loan Documents and the closing of this loan; |
15.2.2. |
all expenses incidental to obtaining a second priority Mississippi Deed of Trust on the Property, abstracting costs, title examination fees, title insurance premiums, mortgage taxes, documentary stamp taxes, and closing costs; |
15.2.3. |
survey costs, appraisal costs and costs for environmental reports, soil reports, and structural design reports; |
15.2.4. |
recording and filing fees and notary fees; |
15.2.5. |
other reasonable fees and expenses involved in the closing of this loan; |
15.2.6. |
In addition to the legal fees described at Section 15.2.1, all attorneys fees and expenses payable by Lender which are incidental to (a) the enforcement or defense after the occurrence and during the continuance of a Default of any or all of the Loan Documents and any instrument executed pursuant thereto; (b) the negotiation and preparation of any renewals or modifications to any of the Loan Documents requested by Borrower, SunLink or Healthcare ; and (c) rendering any advice to Lender related to the Loan Documents, and any transactions contemplated thereby or related to the enforcement or defense thereof after the occurrence and during the continuance of a Default; and |
15.3. |
Notices . Any notices or other communications required or permitted hereunder shall be sufficiently given if delivered personally, by next day courier service or sent by confirming facsimile transmission or by registered or certified mail, postage prepaid, return receipt requested and addressed as listed below or to such other address as the party concerned may substitute by written notice to the other. All notices shall be deemed received on the date of personal delivery or courier delivery, the date of confirmation of receipt of a facsimile transmission, or within three days (excluding Saturdays, Sundays and holidays recognized in the United States) after being mailed: |
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To Borrower: |
Southern Health Corporation of Houston, Inc. |
900 Circle 75 Parkway |
Atlanta, GA 30339 |
Attn: Mark Stockslager |
With a copy to: |
Smith, Gambrell & Russell, LLP |
1230 Peachtree Street, NE |
Suite 3100, Promenade Two |
Atlanta, GA 30309 |
Attn: Howard E. Turner, Esq. |
To Lender: |
Stillwater National Bank and Trust Company |
6301 Waterford Boulevard, Suite 101 |
Oklahoma City, OK 73118 |
Attn: Chief Credit Officer |
With a copy to: |
Bryan J. Wells and Jared D. Giddens |
Conner & Winters, LLP |
One Leadership Square |
211 N. Robinson, Suite 1700 |
Oklahoma City, OK 73102 |
Fax No.: (405) 232-2695 |
15.4. |
Amendment and Waiver . This Loan Agreement and the Loan Documents may not be amended or modified in any way, except by an instrument in writing executed by all of the parties thereto; provided, however, Lender may, in writing: (i) extend the time for performance of any of the obligations of Borrower; (ii) waive any breach or Default by Borrower; and (iii) waive the satisfaction of any condition that is precedent to the performance of Lenders obligations under this Loan Agreement. In the event of a waiver of a breach or Default by Lender, such specific breach or Default shall be deemed to have been cured and not continuing, but no such waiver shall extend to the reoccurrence of the same breach or Default or any subsequent or other breach or Default or impair any consequence of such subsequent or other breach or Default. |
15.5. |
Non-Waiver; Cumulative Remedies . No failure on the part of Lender to exercise and no delay in exercising any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right hereunder preclude any other or further right of exercise thereof. The remedies herein provided are cumulative and not alternative. |
15.6. |
Applicable Law . This Loan Agreement, all of the Loan Documents and all other documents executed pursuant thereto and in connection therewith to evidence or secure the loans contemplated hereby shall be deemed to be a contract made under the laws of the State of Oklahoma, except the Deed of Trust and Assignment of Rents which shall be governed by Mississippi law respectively. Nothing in this Loan Agreement shall be construed to constitute Lender as a joint venturer with Borrower or to constitute a partnership among any of such parties. |
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15.7. |
Descriptive Headings . The descriptive headings of the sections and paragraphs of this Loan Agreement are for convenience only and shall not be used in the construction of the terms hereof. |
15.8. |
Integrated Agreement . This Loan Agreement, all of the Loan Documents and the other loan documents executed pursuant hereto or in connection herewith constitute the entire agreement between the parties hereto, and there are no agreements, understandings, warranties or representations between the parties other than those set forth in such documents. |
15.9. |
Time of Essence . Time is of the essence of this Loan Agreement. |
15.10. |
Binding Effect . This Loan Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors, personal representatives, legal representatives and assigns. |
15.11. |
Third Party Beneficiary . Nothing in this Loan Agreement, express or implied, is intended to confer on any person, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Loan Agreement. |
15.12. |
Right to Defend . Lender shall have the right, but not the obligation, at Borrowers expense, to commence, to appear in or to defend any action or proceeding (initiated by a third party against Borrower) excluding any insured medical malpractice suit or claim, purporting to affect the rights or duties of the parties hereunder and in connection therewith pay out of the funds of the loan all necessary expenses, including fees of counsel, if Borrower fails to so commence, appear in or defend any such action or proceedings with counsel reasonably satisfactory to Lender. |
15.13. |
Participation . Lender is authorized to sell participation interests in the loan evidenced by this Agreement to other financial institutions; and Borrower agrees that subject to the terms of the agreements of participation, each holder of a participation interest will be entitled to rely on the terms of the loan documents executed in connection herewith as if such holder had been named as an original party to the loan documents. Borrower hereby ratifies and authorizes the delivery by Lender either before or after closing of any and all financial and other information regarding Borrower, together with copies of the Loan Documents, to any potential or actual participant. |
15.14. |
Disclosure of Information; Confidentiality . Lender agrees to hold any confidential information that it may receive from Borrower, Guarantor or SunLink pursuant to this Loan Agreement in confidence, except for disclosure: (a) on a confidential basis |
31
to legal counsel, independent public accountants and other professional advisors of Lender; (b) to regulatory officials having jurisdiction over Lender; (c) as required by applicable law or legal process (provided that, in the event Lender is so required to disclose such confidential information, Lender shall promptly notify Borrower, so that Borrower, Guarantor or SunLink or any of them may seek a protective order or other appropriate remedy) or in connection with any legal proceeding between Lender and Borrower, Guarantor, SunLink or any of them; and (d) to another financial institution in connection with a disposition or proposed disposition to that financial institution of all or part of Lenders interests hereunder or a participation interest in the Loan, provided that such disclosure is made subject to an appropriate confidentiality agreement on terms substantially similar to this Section. For purposes of the foregoing, confidential information shall mean all information respecting Borrower, Guarantor, SunLink, or any of them, other than (i) information previously filed by Borrower, Guarantor or SunLink with any governmental authority and available to the public, and (ii) information previously published in any public medium from a source other than, directly or indirectly, Lender. Use of information by counsel in enforcement proceedings after Default shall not constitute a prohibited disclosure of information under this section. |
15.15. |
Accuracy of Information . This Loan Agreement has been entered into by Lender based upon the information, data and representations furnished by Borrower to Lender, and Lenders obligation to close and fund the loan is subject to the continued accuracy of all matters submitted to Lender herewith. By acceptance hereof, Borrower warrants to Lender that all such information, data and representations heretofore and hereafter furnished to Lender are true and correct in all material respects and there is contained therein no untrue statement of a material fact and this warranty shall be true at the time the Loan is closed and shall survive closing. There shall be no material change at the time the Working Capital Loan is closed of the income and expenses of the Property, the financial condition of Borrower and all other features of the transaction shall be in all material respects as represented by Borrower to Lender. |
15.16. |
Maximum Legal Rate of Interest . Notwithstanding any other provisions of this Loan Agreement or any of the Loan Documents to the contrary, the total interest charges incurred by Borrower pursuant to the Working Capital Note shall not exceed the maximum legal rate of interest under Oklahoma law. If the holder of the Working Capital Note shall ever be entitled to receive, collect or apply, as interest on the loans, any amount in excess of the maximum legal rate of interest permitted to be charged by applicable law, and, in the event any holder of the Working Capital Note ever receives, collects or applies, as interest, any such excess, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance of the Working Capital Note, and if the principal balance is paid in full, any remaining excess shall be forthwith paid to Borrower. In determining whether or not the interest paid or payable under any specific contingency exceeds the highest lawful rate, Borrower and Lender shall, to the maximum extent permitted, under applicable law: (a) characterize any non-principal payment as an expense, fee or premium rather than as interest; (b) exclude voluntary prepayments and the effects thereof; (c) spread the total amount of interest on the Working Capital Note throughout the entire term of the Working Capital Note so that the interest rate is uniform throughout the entire term of the Working Capital Note. |
32
15.17. |
No Responsibility of Lender . Notwithstanding any term or provision of the Loan Documents, Lender shall not have any obligation or responsibility for the management, conduct or operation of the business and affairs of Borrower. No provision hereof or of any of the other Loan Documents shall be construed or interpreted to create any relationship between Borrower and Lender other than that of debtor and creditor. |
15.18. |
No Leasing or Drilling . Borrower shall not, without the prior written consent of Lender, permit any drilling or exploration for or extraction, removal or production of any mineral, natural element, compound or substance from the surface or subsurface of the Property regardless of the depth thereof or the method of mining or extraction thereof and agree to defend, indemnify, save and hold Lender, its officers, agents, servants, employees, successors and assigns harmless from any and all claims, liabilities, losses or expenses which may be incurred by Lender, and any and all other expenses or losses, either direct or consequential, which are attributable, or alleged in any way to be attributable, to the development and exploitation of mineral rights in, on or around the Property by Borrower or any other party. |
15.19. |
Notice of Title Protection . Lender is obtaining its own title protection in this transaction, and Borrower should seek competent advice as to whether Borrower should obtain any additional title protection to protect Borrower. |
15.20. |
Jurisdiction and Venue . Borrower hereby submits to the jurisdiction of any state or federal court located in Oklahoma County, Oklahoma, or Chickasaw County, Mississippi, as elected by Lender or required by applicable state law, in connection with any action or proceeding commenced for the collection, enforcement, or defense of this Loan Agreement, the Working Capital Note, the Deed of Trust, or any of the other Loan Documents, and hereby waives all objections to venue or any objections based on the theory of non-convenient forum in connection therewith. |
15.21. |
Counterparts . This Loan Agreement may be executed in two or more counterparts, each of which will be an original instrument, but all of which taken together will constitute one agreement. |
15.22. |
Defined Terms . Capitalized terms defined herein shall have the same meaning in the Loan Documents unless otherwise defined therein. Certain defined terms are located in the Sections identified below: |
Term | Section | |
Affiliate |
10.17 | |
Assignment of Rents |
4.2 |
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Borrower |
1 st Paragraph | |
Borrowers Personal Property |
4.3 | |
Business Day |
8.5 | |
Current Ratio |
10.31 | |
Deed of Trust |
4.1 | |
Default |
13 | |
EHR Payments |
10.6.1 | |
Event of Default |
13.3 | |
Filing Deadline |
10.4 | |
Financial Covenants |
10.7 | |
Financial Ratios Compliance Certificate |
10.7 | |
Funded Debt to EBITDA Ratio |
10.6.4 | |
GAAP |
6.5 | |
Guarantors |
5 | |
Healthcare |
Recitals | |
Healthcare Guaranty |
5 | |
HIPAA |
10.15 | |
Historical Financial Statements |
6.5 | |
Interest Rate |
2.2 | |
IRC |
10.4 | |
IRS |
10.4 | |
Lender |
1 st Paragraph | |
Lenders Inspector |
10.15 | |
Loan Agreement |
1 st Paragraph | |
Loan Commitment |
1 | |
Loan Documents |
7.1 | |
Maturity Date |
2.3 | |
MOB |
1 | |
Net Intercompany Funding |
10.6.2 | |
OFAC |
12.1.1 | |
Ordinary Affiliate Indebtedness |
10.26 | |
Permitted Contingent Liabilities |
10.23 | |
Permitted Indebtedness |
10.26 | |
Prime Rate |
2.2 | |
Property |
4.1 | |
Stock Certificates |
4.4 | |
Stock Pledge Agreement |
4.4 | |
Stock Power |
4.4 | |
Submission Deadline |
10.4 | |
SunLink |
Recitals | |
SunLink Guaranty |
5 |
IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed as of the day and year first above written.
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SOUTHERN HEALTH CORPORATION OF HOUSTON, INC., a Georgia corporation | ||
By: | ||
MARK J. STOCKSLAGER, Assistant Treasurer |
||
(Borrower) |
STILLWATER NATIONAL BANK AND TRUST COMPANY | ||
By: | ||
Name: | ||
Title: | ||
(Lender) |
35
Exhibit 21.1
LIST OF SUBSIDIARIES
The direct and indirect subsidiaries of SunLink Health Systems, Inc. are listed below:
Name of Subsidiary |
SunLink Services, Inc. |
SunLink ScriptsRx, LLC |
SunLink Healthcare LLC |
SunLink Pharmacy Management |
LTC ScriptsRx, LLC |
KRUG International (UK) Limited |
HealthMont LLC |
Bradley International Holdings Limited |
Klippan S.A.R.L. |
Klippan GmbH |
Dexter Hospital LLC |
Southern Health Corporation of Houston, Inc. |
Southern Health Corporation of Ellijay, Inc. |
Southern Health Corporation of Dahlonega, Inc. |
HealthMont of Georgia Inc. |
HealthMont of Missouri, LLC |
Carmichaels Cashway Pharmacy, Inc. |
Carmichaels Nutritional Distributor, Inc. |
Breath of Life Home Health Equipment |
HomeTown Health LLC |
Southeastern Healthcare Alliance, Inc. |
Central Alabama Medical Associates, LLC |
Dahlonega Clinic LLC |
Castlemark Properties, LLC |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-99667, 333-99669 and 333-137474 of SunLink Health Systems, Inc. on Forms S-8, of our reports dated September 20, 2012, appearing in this Annual Report on Form 10-K of SunLink Health Systems, Inc. for the year ended June 30, 2012.
/s/Cherry, Bekaert & Holland, L.L.P.
Atlanta, Georgia
September 20, 2012
Exhibit 31.1
CERTIFICATION
I, Robert M. Thornton, Jr., the Chief Executive Officer of SunLink Health Systems, Inc. (the Company), certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
(4) The Companys other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2012 (the Evaluation Date) based on such evaluation; and
(d) Disclosed in this report any change in the Companys internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and
(5) The Companys other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
Dated: September 20, 2012 | / S / R OBERT M. T HORNTON , J R . | |||||
Robert M. Thornton, Jr. SunLink Health, Systems, Inc. Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Mark J. Stockslager, the Chief Financial Officer of SunLink Health Systems, Inc. (the Company), certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
(4) The Companys other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Companys disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2012 (the Evaluation Date) based on such evaluation; and
(d) Disclosed in this report any change in the Companys internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting; and
(5) The Companys other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Companys auditors and the audit committee of the Companys board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Companys ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Companys internal control over financial reporting.
Dated: September 20, 2012 | / S / M ARK J. S TOCKSLAGER | |||||
Mark J. Stockslager SunLink Health, Systems, Inc. Chief Financial Officer |
Exhibit 32.1
SUNLINK HEALTH SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of SunLink Health Systems, Inc. (the Company) on Form 10-K for the year ended June 30, 2012, as filed with the United States Securities and Exchange Commission on the date hereof (the Report), I, Robert M. Thornton, Jr., Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 20, 2012 | / S / R OBERT M. T HORNTON , J R . | |||||
Robert M. Thornton, Jr. SunLink Health, Systems, Inc. Chief Executive Officer |
Exhibit 32.2
SUNLINK HEALTH SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of SunLink Health Systems, Inc. (the Company) on Form 10-K for the year ended June 30, 2012, as filed with the United States Securities and Exchange Commission on the date hereof (the Report), I, Mark J. Stockslager, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: September 20, 2012 | / S / M ARK J. S TOCKSLAGER | |||||
Mark J. Stockslager SunLink Health, Systems, Inc. Chief Financial Officer |