ITEM 1. FINANCIAL STATEMENTS
SUNLINK
HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2016
|
|
|
June 30,
|
|
|
|
(unaudited)
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,801
|
|
|
$
|
3,261
|
|
Receivables - net
|
|
|
5,906
|
|
|
|
6,166
|
|
Inventory
|
|
|
2,323
|
|
|
|
2,612
|
|
Deferred income tax asset
|
|
|
0
|
|
|
|
624
|
|
Current assets held for sale
|
|
|
0
|
|
|
|
2,461
|
|
Prepaid expense and other assets
|
|
|
3,008
|
|
|
|
2,768
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
24,038
|
|
|
|
17,892
|
|
|
|
|
Property, plant and equipment, at cost
|
|
|
31,378
|
|
|
|
33,914
|
|
Less accumulated depreciation
|
|
|
20,686
|
|
|
|
20,920
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
|
|
10,692
|
|
|
|
12,994
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Intangible assets - net
|
|
|
2,660
|
|
|
|
2,695
|
|
Goodwill
|
|
|
461
|
|
|
|
461
|
|
Deferred income tax asset
|
|
|
0
|
|
|
|
1,698
|
|
Noncurrent assets held for sale
|
|
|
2,136
|
|
|
|
7,633
|
|
Other noncurrent assets
|
|
|
676
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
5,933
|
|
|
|
13,219
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
40,663
|
|
|
$
|
44,105
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,160
|
|
|
$
|
3,391
|
|
Current maturities of long-term debt
|
|
|
7,113
|
|
|
|
7,473
|
|
Accrued payroll and related taxes
|
|
|
2,347
|
|
|
|
2,872
|
|
Due to third party payors
|
|
|
1,042
|
|
|
|
1,883
|
|
Income tax payable
|
|
|
81
|
|
|
|
2
|
|
Current liabilities held for sale
|
|
|
0
|
|
|
|
2,745
|
|
Other accrued expenses
|
|
|
1,621
|
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,364
|
|
|
|
20,051
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,710
|
|
|
|
2,979
|
|
Deferred income tax liability
|
|
|
378
|
|
|
|
0
|
|
Noncurrent liability for professional liability risks
|
|
|
1,131
|
|
|
|
1,161
|
|
Other noncurrent liabilities
|
|
|
519
|
|
|
|
425
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,738
|
|
|
|
4,565
|
|
Commitment and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Preferred Shares, authorized and unissued, 2,000 shares
|
|
|
0
|
|
|
|
0
|
|
Common Shares, without par value:
|
|
|
|
|
|
|
|
|
Issued and outstanding, 9,444 shares at September 30, 2016 and at June 30, 2016
|
|
|
4,722
|
|
|
|
4,722
|
|
Additional paid-in capital
|
|
|
13,588
|
|
|
|
13,539
|
|
Retained earnings
|
|
|
4,671
|
|
|
|
1,648
|
|
Accumulated other comprehensive loss
|
|
|
(420
|
)
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
22,561
|
|
|
|
19,489
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
40,663
|
|
|
$
|
44,105
|
|
|
|
|
|
|
|
|
|
|
2
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Operating revenues (net of contractual allowances)
|
|
$
|
13,079
|
|
|
$
|
17,300
|
|
Less provision for bad debts of Healthcare Facilities Segment
|
|
|
33
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
13,046
|
|
|
|
16,584
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,636
|
|
|
|
4,597
|
|
Salaries, wages and benefits
|
|
|
5,845
|
|
|
|
8,317
|
|
Provision for bad debts of Specialty Pharmacy Segment
|
|
|
91
|
|
|
|
222
|
|
Supplies
|
|
|
436
|
|
|
|
916
|
|
Purchased services
|
|
|
708
|
|
|
|
869
|
|
Other operating expenses
|
|
|
1,710
|
|
|
|
2,201
|
|
Rent and lease expense
|
|
|
129
|
|
|
|
201
|
|
Depreciation and amortization
|
|
|
444
|
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
(953
|
)
|
|
|
(1,166
|
)
|
Other Income, (Expense):
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
22
|
|
|
|
1
|
|
Gain on extinguishment of debt
|
|
|
46
|
|
|
|
0
|
|
Interest expense - net
|
|
|
(221
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations before income taxes
|
|
|
(1,106
|
)
|
|
|
(1,382
|
)
|
Income Tax Expense (Benefit)
|
|
|
144
|
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations
|
|
|
(1,250
|
)
|
|
|
(1,133
|
)
|
Earnings from Discontinued Operations, net of tax
|
|
|
4,273
|
|
|
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)
|
|
|
3,023
|
|
|
|
(1,668
|
)
|
Other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Earnings (Loss)
|
|
$
|
3,023
|
|
|
$
|
(1,668
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share:
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.45
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.45
|
|
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.32
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,443
|
|
|
|
9,443
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
9,443
|
|
|
|
9,443
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
$
|
(3,190
|
)
|
|
$
|
(815
|
)
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of Chestatee
|
|
|
14,620
|
|
|
|
0
|
|
Expenditures for property, plant and equipment - continuing operations
|
|
|
(244
|
)
|
|
|
(463
|
)
|
Expenditures for property, plant and equipment - discontinued operations
|
|
|
0
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Investing Activities
|
|
|
14,376
|
|
|
|
(478
|
)
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Payments on long-term debt - continuing operation
|
|
|
(1,646
|
)
|
|
|
(175
|
)
|
Payments on long-term debt - discontinued operations
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(1,646
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in Cash and Cash Equivalents
|
|
|
9,540
|
|
|
|
(1,468
|
)
|
|
|
|
Cash and Cash Equivalents Beginning of Period
|
|
|
3,261
|
|
|
|
5,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents End of Period
|
|
$
|
12,801
|
|
|
$
|
4,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplement Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid (Received) for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
206
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
33
|
|
|
$
|
76
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2016
(all dollar amounts in thousands except per share amounts)
(unaudited)
Note 1. Basis of
Presentation
The accompanying unaudited Condensed Consolidated Financial Statements as of September 30, 2016 and for the three month
periods ended September 30, 2016 and 2015 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC) and, as such, do not include all information required by accounting principles
generally accepted in the United States of America (GAAP). The condensed consolidated June 30, 2016 balance sheet included in this interim filing has been derived from the audited financial statements at that date but does not
include all of the information and related notes required by GAAP for complete financial statements. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the
SunLink Health Systems, Inc. (SunLink, we, our, ours, us or the Company) Annual Report on Form 10-K for the fiscal year ended June 30, 2016, filed with the SEC on September 30,
2016. In the opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of
operations for the periods indicated. The results of operations for the three month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
Note 2. Business Operations
Business
Operations
SunLink owns businesses which are providers of healthcare services in certain markets in the United States. SunLinks
business is composed of the ownership of two business segments:
|
|
The Healthcare Facilities Segments, which is composed of:
|
|
|
|
A subsidiary which owns and operates an 84-licensed-bed, acute care hospital, which includes an 18-bed GPU, and a 66-bed nursing home.
|
|
|
|
A subsidiary which owns and operates a 100-bed nursing home. This subsidiary also owns a hospital building and leases the portion of that building occupied by the emergency department to an unaffiliated healthcare
provider.
|
|
|
|
Two separate subsidiaries which own medical buildings, which are leased to unaffiliated healthcare providers.
|
|
|
|
A subsidiary which owns a closed hospital building and a medical office building which it currently rents office space to one unaffiliated healthcare provider.
|
|
|
The Specialty Pharmacy Segment, which is composed of four operational areas:
|
|
|
|
Retail pharmacy products and services, all of which are conducted in rural markets;
|
|
|
|
Institutional pharmacy services;
|
|
|
|
Specialty pharmacy services; and
|
|
|
|
Durable medical equipment.
|
Our Specialty Pharmacy Segment currently is operated through
Carmichaels Cashway Pharmacy, Inc. (Carmichael), a subsidiary of our SunLink ScriptsRx, LLC subsidiary.
5
The business strategy of SunLink is to focus its efforts on improving internal operations of the
existing pharmacy business and healthcare facilities subsidiaries and on the sale or disposition of its subsidiaries underperforming assets. The Company considers the disposition of facilities and operations based on a variety of factors in
addition to under-performance, including asset values, return on investments and competition from existing and potential competitors, capital improvement needs, prevailing reimbursement rates for drugs and medical services under various Federal and
state programs (e.g., Medicare and Medicaid) and by private payors, corporate strategy and other corporate objectives. The Company also is considering potential upgrades and improvements to certain of its healthcare facilities. The Company believes
its Healthcare Facilities Segment and its Pharmacy Segment continues to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its specialty pharmacy business. The Company also has an agreement, subject
to various conditions, to sell a medical office building. The Company has used cash proceeds from recent dispositions of assets to pay off certain liabilities and may use a portion of its existing cash assets, as well as any net proceeds from future
dispositions, to prepay long-term debt, return capital to shareholders via a repurchase of shares or a dividend, make improvements to existing facilities, and for other general corporate purposes. There can be no assurance that any further
dispositions will be authorized by the Companys Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
Throughout these notes to the consolidated financial statements, SunLink Health Systems, Inc., and its consolidated subsidiaries are referred
to on a collective basis as SunLink, we, our, ours, us or the Company. This drafting style is not meant to indicate that the publicly traded Company or any particular subsidiary
of the Company owns or operates any asset, business or property. The Trace Hospital, pharmacy operations and businesses described in this filing are owned and operated by distinct and indirect subsidiaries of SunLink Health System, Inc.
Note 3. Discontinued Operations
All of the businesses discussed in the note below are reported as discontinued operations and the condensed consolidated financial statements
for all prior periods have been adjusted to reflect this presentation.
Results for all of the businesses included in discontinued
operations are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net Revenues:
|
|
|
|
|
|
|
|
|
Chestatee Hospital
|
|
$
|
2,101
|
|
|
$
|
3,888
|
|
Other Sold Hospitals
|
|
|
(234
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,867
|
|
|
$
|
3,988
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes:
|
|
|
|
|
|
|
|
|
Chestatee Hospital
|
|
$
|
(64
|
)
|
|
$
|
(594
|
)
|
Other Sold Hospitals
|
|
|
(238
|
)
|
|
|
(188
|
)
|
Life sciences and engineering
|
|
|
(37
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes
|
|
|
(339
|
)
|
|
|
(818
|
)
|
|
|
|
Gain on Sale:
|
|
|
|
|
|
|
|
|
Chestatee Hospital
|
|
|
7,246
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) before income taxes
|
|
|
7,246
|
|
|
|
(818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
2,634
|
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) from discontinued operations
|
|
$
|
4,273
|
|
|
$
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
Chestatee Hospital
On August 19, 2016, the Companys subsidiary Southern Health
Corporation of Dahlonega, Inc. (Chestatee) sold substantially all of the assets and certain liabilities of Chestatee Regional Hospital in Dahlonega, Georgia through an asset purchase agreement for $15,000 subject to adjustment for the
book value of certain assets and certain liabilities assumed at the sale date. The pre-tax gain on sale of $7,246 is subject to adjustment for various purchase price adjustments. Chestatee retained certain liabilities, including for employee related
liabilities and certain Medicare and Medicaid liabilities, relating to the period it owned and operated the hospital. A portion of the net proceeds have been used for the payment of debt. The assets sold and liabilities assumed are shown as
assets held for sale in our consolidated balances as of June 30, 2016.
6
Other Sold Hospitals
Subsidiaries of the Company have sold substantially all
of the assets of three hospitals (Other Sold Hospitals) during the period July 2, 2012 to December 31, 2014. Certain assets and liabilities were retained in these sales and the results of the retained assets and liabilities are
classified as discontinued operations in our condensed consolidated financial statements for the three month periods ended September 30, 2016 and 2015. The loss before income taxes of the Other Sold Hospitals results primarily from negative prior
year Medicare and Medicare cost report settlements.
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 three months ended September 30, 2016 and 2015.
The components of pension expense for the three months ended September 30, 2016 and 2015, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Interest Cost
|
|
$
|
13
|
|
|
$
|
16
|
|
Expected return on assets
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Amortization of prior service cost
|
|
|
32
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
37
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
SunLink contributed $35 to the plan in the three months ended September 30, 2016 and expects to contribute an
additional $105 during the last three quarter of the fiscal year ending June 30, 2017.
Note 4. Assets held for sale
On November 7, 2016, the Companys subsidiary SunLink Healthcare Professional Property, LLC entered into an agreement to sell a medical
office building in Ellijay, Georgia for approximately $4,900. The sale is subject to a number conditions, including buyer due diligence and is expected to close by December 31, 2016. The net assets to be sold of $2,136 have been reclassified as
Assets Held for Sale in the September 30, 2016 Condensed Consolidated Balance Sheet.
Note 5. Shareholders Equity
Tax Benefits Protection Rights Plan
On September 29, 2016, SunLink entered into a Tax Benefits Preservation Rights Plan (the Tax Benefits Protection Rights Plan).
Effective September 29, 2016, the Board declared a dividend in the form of one preferred stock purchase right for each of the Companys issued and outstanding common shares. The purpose of the Tax Benefits Protection Rights Plan is to diminish
the risk that the Companys ability to use its net operating losses and certain other tax assets to reduce potential future federal income tax obligations would become subject to limitations by reason of the Company experiencing an
ownership change, as defined in Section 382 of the Code.
Stock-Based Compensation
For the three months ended September 30, 2016 and 2015, the Company recognized $49 and $30, respectively, in stock based compensation for
options issued to employees and directors of the Company. The fair value of the share options granted was estimated using the Black-Scholes option pricing model. There were 72,000 and 30,000 share options granted under the 2011 Director
Stock Option Plan during the three months ended September 30, 2016 and 2015, respectively. There were 45,000 share options granted under the 2005 Equity Incentive Plan during the three months ended September 30, 2015.
7
Note 6. Revenue Recognition and Accounts Receivables
The Companys subsidiaries recognize revenues in the period in which services are provided. Accounts receivable primarily consist of
amounts due from third-party payors and patients. The Companys subsidiaries ability to collect outstanding receivables is critical to their results of operations and cash flows. Amounts the Companys subsidiaries receive for
treatment of patients covered by governmental programs such as Medicare and Medicaid and other third-party payors such as health maintenance organizations (HMOs), preferred provider organizations (PPOs) and other private
insurers are generally less than the Companys subsidiaries established billing rates. Additionally, to provide for accounts receivable that could become uncollectible in the future an allowance for doubtful accounts is established to
reduce the carrying value of such receivables to their estimated net realizable value. Accordingly, the revenues and accounts receivable reported in the accompanying unaudited condensed consolidated financial statements are recorded at the net
amount expected to be received.
Revenues by payor were as follows for the three months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Healthcare Facilities Segment:
|
|
|
|
|
|
|
|
|
Medicare
|
|
$
|
2,033
|
|
|
$
|
3,509
|
|
Medicaid
|
|
|
2,496
|
|
|
|
2,922
|
|
Self-pay
|
|
|
119
|
|
|
|
645
|
|
Managed Care & Other Insurance
|
|
|
720
|
|
|
|
2,402
|
|
Other
|
|
|
22
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Revenues before provision for doubtful accounts
|
|
|
5,390
|
|
|
|
9,511
|
|
Provision for doubtful accounts
|
|
|
(33
|
)
|
|
|
(716
|
)
|
|
|
|
|
|
|
|
|
|
Healthcare Facilities Segment Net Revenues
|
|
|
5,357
|
|
|
|
8,795
|
|
Pharmacy Segment Net Revenues
|
|
|
7,341
|
|
|
|
7,567
|
|
Other Revenues
|
|
|
348
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
$
|
13,046
|
|
|
$
|
16,584
|
|
|
|
|
|
|
|
|
|
|
The net revenues of the Pharmacy Segment are presented net of contractual adjustments. The provision for bad debts of the
Pharmacy Segment is presented as a component of operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Summary information for accounts receivable is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Accounts receivable (net of contractual allowances)
|
|
$
|
6,698
|
|
|
$
|
7,157
|
|
Less allowance for doubtful accounts
|
|
|
(792
|
)
|
|
|
(991
|
)
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable - net
|
|
$
|
5,906
|
|
|
$
|
6,166
|
|
|
|
|
|
|
|
|
|
|
8
The following is a summary of the activity in the allowance for doubtful accounts for the
Healthcare Facilities Segment and the Pharmacy Segment for the three months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016,
|
|
Healthcare
Facilities
|
|
|
Pharmacy
|
|
|
Total
|
|
Balance at July 1, 2016
|
|
$
|
624
|
|
|
$
|
367
|
|
|
$
|
991
|
|
Additions recognized as a reduction to revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
33
|
|
|
|
91
|
|
|
|
124
|
|
Discontinued Operations
|
|
|
407
|
|
|
|
|
|
|
|
407
|
|
Accounts written off, net of recoveries
|
|
|
(662
|
)
|
|
|
(68
|
)
|
|
|
(730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
402
|
|
|
$
|
390
|
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015,
|
|
Healthcare
Facilities
|
|
|
Pharmacy
|
|
|
Total
|
|
Balance at July 1, 2015
|
|
$
|
4,962
|
|
|
$
|
385
|
|
|
$
|
5,347
|
|
Additions recognized as a reduction to revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
715
|
|
|
|
222
|
|
|
|
1,004
|
|
Discontinued Operations
|
|
|
1,017
|
|
|
|
|
|
|
|
950
|
|
Accounts written off, net of recoveries
|
|
|
(1,913
|
)
|
|
|
(163
|
)
|
|
|
(2,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015
|
|
$
|
4,781
|
|
|
$
|
444
|
|
|
$
|
5,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. - Goodwill and Intangible Assets
SunLinks goodwill and intangible assets are composed of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
Pharmacy Segment Goodwill
|
|
$
|
461
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
Intangibles consist of the following, net of amortization:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
Pharmacy Segment Intangibles
|
|
|
|
|
|
|
|
|
Trade Name (non-amortizing)
|
|
|
2,000
|
|
|
|
2,000
|
|
Customer Relationships
|
|
|
1,089
|
|
|
|
1,089
|
|
Medicare License
|
|
|
769
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,858
|
|
|
|
3,858
|
|
Accumulated Amortization
|
|
|
(1,198
|
)
|
|
|
(1,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangibles
|
|
$
|
2,660
|
|
|
$
|
2,695
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $36 and $36 for the three months ended September 30, 2016 and 2015, respectively.
9
Note 8. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Trace RDA Loan
|
|
$
|
7,575
|
|
|
$
|
7,698
|
|
SHPP RDA Loan
|
|
|
1,940
|
|
|
|
1,950
|
|
Carmichael Notes
|
|
|
0
|
|
|
|
1,508
|
|
Capital lease obligations and other
|
|
|
27
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,542
|
|
|
|
11,188
|
|
Less unamortized debt issuance costs
|
|
|
(719
|
)
|
|
|
(736
|
)
|
Less current maturities
|
|
|
(7,113
|
)
|
|
|
(7,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,710
|
|
|
$
|
2,979
|
|
|
|
|
|
|
|
|
|
|
Trace RDA Loan and Trace Working Capital Loan
On July 11, 2012, SunLink and two wholly
owned subsidiaries of the Company, closed on a $9,975 Mortgage Loan Agreement (Trace RDA Loan) and a Working Capital Loan Agreement (Trace Working Capital Loan), both dated as of July 5, 2012.
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% (6.0% at September 30, 2016). The Trace RDA Loan is collateralized by real estate and equipment of Trace Regional
Hospital (Trace) in Houston, MS and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program.
The Trace Working Capital Loan as amended provided for a revolving line of credit which expired on July 2, 2016 and was not renewed. At
June 30, 2016, there were no outstanding borrowings under the Trace Working Capital Loan.
The Trace RDA Loan contains various terms and
conditions, including financial restrictions and limitations, and affirmative and negative covenants. The covenants include financial covenants measured on a quarterly basis which require Trace to comply with a ratio of current assets to current
liabilities, debt service coverage, fixed charge ratio, and funded debt to EBITDA, all as defined in the Trace RDA Loan. At September 30, 2016 and June 30, 2016, Trace was not in compliance with the debt service coverage, fixed charge ratio and
funded debt to EBITDA ratios. No modification or waiver for the September 30, 2016 nor the June 30, 2016 non-compliance has been obtained as of November 10, 2016 and accordingly, the indebtedness of $7,575 as of September 30, 2106 and $7,698 as of
June 30, 2016 are presented in current liabilities in the condensed consolidated balance sheets for these dates. The Company is discussing a modification or waiver of this non-compliance with the lender. The ability of Trace to continue to make the
required debt service payments under the Trace RDA Loan depends on, among other things, its ability to generate sufficient cash flows, including from operating activities. If Trace is unable to generate sufficient cash flow from operations to
meet debt service payments on the Trace RDA Loan, including in the event the lender were to declare an event of default and accelerate the maturity of the indebtedness, such failure could have material adverse effects on the Company. The Trace
RDA Loan is guaranteed by the Company and one subsidiary.
SHPP RDA Loan
On November 6, 2012, SunLink
Healthcare Professional Property, LLC (SHPP), a subsidiary of the Company, entered into and closed on a $2,100 term loan dated as of October 31, 2012 (the SHPP RDA Loan). SHPP owns and leases a medical office
building to Southern Health Corporation of Ellijay, Inc. (SHC Ellijay). SHC Ellijay owns and operates North Georgia Medical Center (North Georgia), located in Ellijay, Georgia.
The SHPP RDA Loan has a term of 25 years with monthly payments of principal and interest until repaid. The SHPP RDA Loan bears
interest at a floating rate of interest equal to the greater of (i) the prime rate (as published in The Wall Street Journal) plus 2.0%, or (ii) 5% (5.50% at September 30, 2016). The SHPP RDA Loan is collateralized by SHPPs
real estate, equipment and leases and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. The SHPP RDA Loan contains certain financial covenants with respect to the ratio of
current assets to current liabilities and debt service coverage, all as defined in
10
the SHPP RDA Loan Agreement, which SHPP must maintain and that are measured at the end of each fiscal year. The SHPP RDA Loan is guaranteed by the Company and one subsidiary.
SHPP has entered into an agreement to sell the medical office which is the collateral under this loan, and the loan will be paid off upon the sale, if it is consummated.
Carmichael Notes
On April 22, 2008, SunLink Scripts Rx, LLC issued a $3,000 promissory note with an interest rate of
8% to the former owners of Carmichael as part of the acquisition purchase price (the Carmichael Notes). The Carmichael Notes, as amended, were payable in semi-annual installments of $185 of principal and plus accrued interest, with the
remaining balance of $1,255 due October 22, 2017. Under an agreement dated September 9, 2016, between the Company and the Note holders, the Carmichael Notes balance of $1,508 was paid in full on September 9, 2016 and the accrued interest
payable to that date of $46 was forgiven. A gain on retirement of debt of $46 for the three months ended September 30, 2016 was reported for the interest payable forgiveness.
ASU 2015-3, Simplifying the Presentation of Debt Issuance Costs
In April 2015, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-3, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-3). ASU 2015-3 requires debt
issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than separately as an asset. The Company
adopted the provisions of ASU 2015-3 on July 1, 2016 and retrospectively for all periods presented. The adoption of ASU 2015-3 had no impact on the Companys results of operations or cash flows.
The following is a summary of the line items impacted by the adoption of ASU 2015-3 in the Companys June 30, 2016 accompanying condensed
consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Originally
Reported
|
|
|
Adjustments for
the Adoption of
ASU 2015-3
|
|
|
As
Currently
Reported
|
|
Prepaid expense and other current assets
|
|
$
|
2,777
|
|
|
$
|
(9
|
)
|
|
$
|
2,768
|
|
Total current assets
|
|
$
|
17,901
|
|
|
$
|
(9
|
)
|
|
$
|
17,892
|
|
Other noncurrent assets
|
|
$
|
1,459
|
|
|
$
|
(727
|
)
|
|
$
|
732
|
|
Total noncurrent assets
|
|
$
|
13,946
|
|
|
$
|
(727
|
)
|
|
$
|
13,219
|
|
Total Assets
|
|
$
|
44,841
|
|
|
$
|
(736
|
)
|
|
$
|
44,105
|
|
Current maturities of long-term debt
|
|
$
|
8,012
|
|
|
$
|
(539
|
)
|
|
$
|
7,473
|
|
Total current liabilities
|
|
$
|
20,590
|
|
|
$
|
(539
|
)
|
|
$
|
20,051
|
|
Long-term debt
|
|
$
|
3,176
|
|
|
$
|
(197
|
)
|
|
$
|
2,979
|
|
Total long-term liabilities
|
|
$
|
4,762
|
|
|
$
|
(197
|
)
|
|
$
|
4,565
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
44,841
|
|
|
$
|
(736
|
)
|
|
$
|
44,105
|
|
Note 9. Income Taxes
Income tax expense of $144 ($210 federal tax expense and $66 state tax benefit) and income tax benefit of $249 ($229 federal tax benefit and
$20 state tax benefit) was recorded for continuing operations for the three months ended September 30, 2016 and 2015, respectively.
In
accordance with the Financial Accounting Standards Board Accounting Standards Codification (ASC) 740, we evaluate our deferred taxes quarterly to determine if adjustments to our valuation allowance are required based on the consideration
of available positive and negative evidence using a more likely than not standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our
expectation of future results of operations, the duration of applicable statuary carryforward periods and conditions of the healthcare industry. The ultimate realization of our deferred tax assets depends primarily on our ability to generate
future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates.
At September 30, 2016, consistent with the above process, we evaluated the need for a valuation against our deferred tax assets and determined
that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of $10,818 against the deferred tax asset so that there is a net deferred income
tax liability of $378 at September 30, 2016. A $378 net deferred long-term income tax liability is recorded at September 30, 2016 as required under interim reporting guidance of ASC 740-270. We conducted our evaluation by considering available
positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in nature as compared to subjective evidence. Also, more
significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future plans.
The principal negative evidence that led us to determine at September 30, 2016 that all the deferred tax assets should have a full valuation
allowances of the net deferred income tax assets was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Facilities Segment
businesses operate. The deferred income tax liability of $378 at September 30, 2016 will be adjusted quarterly as required under the requirements for interim reporting guidance of ASC 740-270.
For Federal income tax purposes, at September 30, 2016, the Company had approximately $10,000 of estimated net operating loss carry-forwards
available for use in future years subject to the limitations of the provisions of Internal Revenue Code Section 382.
Note 10. Commitments and
Contingencies
Sale of Hospital Facilities
The Company has sold four hospital facilities since June 30, 2012 and
in connection with the sales has retained certain assets and liabilities. See Note 3 Discontinued Operations.
11
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to long-term debt, non-cancelable operating leases and interest on outstanding
debt from continuing operations at September 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in:
|
|
Long-Term
Debt
|
|
|
Operating
Leases
|
|
|
Interest on
Outstanding
Debt
|
|
1 year
|
|
$
|
7,637
|
|
|
$
|
461
|
|
|
$
|
519
|
|
2 years
|
|
|
51
|
|
|
|
368
|
|
|
|
104
|
|
3 years
|
|
|
47
|
|
|
|
303
|
|
|
|
101
|
|
4 years
|
|
|
49
|
|
|
|
255
|
|
|
|
98
|
|
5+ years
|
|
|
1,758
|
|
|
|
74
|
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,542
|
|
|
$
|
1,461
|
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. - Related Party Transactions
A director of the Company and the Companys former corporate secretary are members of two different law firms, each of which provides
services to SunLink. The Company has expensed an aggregate of $197 and $84 for legal services to these law firms in the three months ended September 30, 2016 and 2015, respectively. Included in the Companys condensed consolidated balance
sheets at September 30, 2016 and June 30, 2016 is $168 and $75, respectively, of amounts payable to these law firms.
Note 12. - Financial Information
by Segment
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 SunLinks chief executive officer and other members of SunLinks senior management. Our two reportable operating segments are Healthcare Facilities and Pharmacy.
We evaluate performance of our operating segments based on revenue and operating profit (loss). At the beginning of the current fiscal year,
the Company modified the approach to certain assets, and expense allocations to calculate segment assets, operating profit and depreciation and amortization. All prior year amounts have been changed to consistently apply the changed allocation
method used in the current year. Segment information as of September 30, 2016 and 2015 and for the three months then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Facilities
|
|
|
Pharmacy
|
|
|
and Other
|
|
|
Total
|
|
As of and for the three months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
5,455
|
|
|
$
|
7,341
|
|
|
$
|
250
|
|
|
$
|
13,046
|
|
Operating profit (loss)
|
|
|
78
|
|
|
|
(192
|
)
|
|
|
(839
|
)
|
|
|
(953
|
)
|
Depreciation and amortization
|
|
|
173
|
|
|
|
254
|
|
|
|
17
|
|
|
|
444
|
|
Assets
|
|
|
13,686
|
|
|
|
11,420
|
|
|
|
15,557
|
|
|
|
40,663
|
|
Expenditures for property, plant and equipment
|
|
|
54
|
|
|
|
189
|
|
|
|
1
|
|
|
|
244
|
|
|
|
|
|
|
As of and for the three months ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers
|
|
$
|
8,795
|
|
|
$
|
7,567
|
|
|
$
|
222
|
|
|
$
|
16,584
|
|
Operating profit (loss)
|
|
|
(498
|
)
|
|
|
(79
|
)
|
|
|
(589
|
)
|
|
|
(1,166
|
)
|
Depreciation and amortization
|
|
|
181
|
|
|
|
198
|
|
|
|
48
|
|
|
|
427
|
|
Assets
|
|
|
27,080
|
|
|
|
11,855
|
|
|
|
16,360
|
|
|
|
55,295
|
|
Expenditures for property, plant and equipment
|
|
|
35
|
|
|
|
428
|
|
|
|
0
|
|
|
|
463
|
|
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share and admissions data)
Forward-Looking Statements
This
Quarterly Report and the documents that are incorporated by reference in this Quarterly 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
|
|
|
general economic and business conditions in the U.S., both nationwide and in the states in which we operate;
|
|
|
|
increases in uninsured and/or underinsured patients due to unemployment or other conditions, higher deductibles and co-insurance, or other terms of health insurance coverage resulting in higher bad debt amounts;
|
|
|
|
the competitive nature of the U.S. community hospital, nursing home and pharmacy businesses;
|
|
|
|
demographic changes in areas where we operate;
|
|
|
|
the availability of cash or borrowings to fund working capital, renovations, replacements, expansions and capital improvements at existing healthcare and pharmacy facilities and for acquisitions and replacement of such
facilities;
|
|
|
|
changes in accounting principles generally accepted in the U.S.; and,
|
|
|
|
fluctuations in the market value of equity securities including SunLink common shares.
|
Operational Factors
|
|
|
ability or inability to operate profitably in one or more segments of the healthcare business;
|
|
|
|
the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists and staff personnel for our operations;
|
|
|
|
timeliness and amount of reimbursement payments received under government programs;
|
|
|
|
the ability or inability to obtain external financing for working capital included under lending agreements;
|
|
|
|
changes in interest rates under lending agreements and other indebtedness;
|
|
|
|
the ability or inability to refinance former or existing indebtedness and defaults or potential defaults under existing indebtedness;
|
|
|
|
restrictions imposed by existing or future lending and other indebtedness;
|
|
|
|
the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;
|
|
|
|
the efforts of insurers, healthcare providers, government payors and others to contain healthcare costs;
|
|
|
|
the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or in alternative healthcare settings, such as surgery centers or urgent care centers;
|
13
|
|
|
changes in medical and other technology;
|
|
|
|
risks of changes in estimates of self insurance claims and reserves;
|
|
|
|
changes in prices of materials and services utilized in our Healthcare Facilities and Pharmacy Segments;
|
|
|
|
changes in wages as a result of inflation or competition for management, physician, nursing, pharmacy and staff positions;
|
|
|
|
changes in the amount and risk of collectability of accounts receivable, including deductibles and co-pay amounts;
|
|
|
|
the functionality or costs with respect to our information systems for our Healthcare Facilities and Pharmacy Segments and our corporate office, including both software and hardware; and
|
|
|
|
the availability of and competition from alternative drugs or treatments provided by our Pharmacy Segment; and
|
|
|
|
the restrictions, processes and conditions relating to our Pharmacy Segment imposed by pharmacy benefit providers, drug manufacturers and distributors.
|
Liabilities, Claims, Obligations and Other Matters
|
|
|
claims under leases, guarantees, disposition agreements, and other obligations relating to discontinued operations, including claims from sold or leased facilities, retained liabilities, or retained subsidiaries;
|
|
|
|
potential adverse consequences of known and unknown government investigations;
|
|
|
|
claims for product and environmental liabilities from continuing and discontinued operations;
|
|
|
|
professional, general and other claims which may be asserted against us; and,
|
|
|
|
natural disasters and weather-related events such as earthquakes, hurricanes, flooding, snow, ice and wind damage and population evacuations affecting areas in which we operate.
|
Regulation and Governmental Activity
|
|
|
existing and proposed governmental budgetary constraints;
|
|
|
|
Federal and state insurance exchanges and their rules on reimbursement terms;
|
|
|
|
the decision by states in which we operate hospitals (Georgia and Mississippi) to not expand Medicaid;
|
|
|
|
the regulatory environment for our businesses, including state certificate of need laws and regulations, pharmacy licensing laws and regulations, rules and judicial cases relating thereto;
|
|
|
|
adverse changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLinks healthcare services including the payment arrangements and terms of
managed care agreements; EHR reimbursement and indigent care reimbursements (Medicare Upper Payment Limit UPL and Disproportionate Share Hospital DSH adjustments);
|
|
|
|
changes in or failure to comply with Federal, state or local laws and regulations affecting our Healthcare Facilities and Pharmacy Segments; and,
|
|
|
|
the possible enactment of additional Federal healthcare reform laws or reform laws in states where our subsidiaries operate hospital and pharmacy facilities (including Medicaid waivers, bundled payments, accountable
care and similar organizations, competitive bidding, and other reforms).
|
14
Dispositions, Acquisitions, and Renovation Related Matters
|
|
|
the ability to dispose of underperforming facilities;
|
|
|
|
the availability and terms of capital to fund acquisitions, improvements, renovations or replacement facilities; and
|
|
|
|
competition in the market for acquisitions of hospitals, pharmacy facilities and other 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.
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.
You should read this Quarterly 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 Quarterly 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, except as
required by applicable law. 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 and in our Annual Report on Form 10-K.
Business Strategy: Operations, Dispositions and Acquisitions
The business strategy of SunLink is to focus its efforts on improving internal operations of the existing pharmacy business and healthcare
facilities subsidiaries and on the sale or disposition of its subsidiaries underperforming assets. The Company considers the disposition of facilities and operations based on a variety of factors in addition to under-performance, including
asset values, return on investments and competition from existing and potential competitors, capital improvement needs, prevailing reimbursement rates for drugs and medical services under various Federal and state programs (e.g., Medicare and
Medicaid) and by private payors, corporate strategy and other corporate objectives. The Company also is considering potential upgrades and improvements to certain of its healthcare facilities. The Company believes its Healthcare Facilities Segment
and its Pharmacy Segment continues to under-perform, and the Company has engaged advisors to assist it in evaluating the possible sale of its specialty pharmacy business. The Company also has an agreement, subject to various conditions, to sell a
medical office building. The Company has used cash proceeds from recent dispositions of assets to pay off certain liabilities and may use a portion of its existing cash assets, as well as any net proceeds from future dispositions, to prepay
long-term debt, return capital to shareholders via a repurchase of shares or a dividend, make improvements to existing facilities, and for other general corporate purposes. There can be no assurance that any further dispositions will be authorized
by the Companys Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
15
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:
|
|
|
it requires assumptions to be made that were uncertain at the time the estimate was made; and
|
|
|
|
changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.
|
Our critical accounting estimates are more fully described in our 2016 Annual Report on Form 10-K and continue to include the following areas:
|
|
|
Receivables net and provision for doubtful accounts;
|
|
|
|
Revenue recognition / Net Patient Service Revenues;
|
|
|
|
Goodwill, intangible assets and accounting for business combinations;
|
|
|
|
Professional and general liability claims; and
|
|
|
|
Accounting for income taxes
|
Financial Summary
The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Facilities and
Pharmacy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
Net Revenues - Healthcare Facilities
|
|
$
|
5,455
|
|
|
$
|
8,795
|
|
|
|
-38.0
|
%
|
Net Revenues - Pharmacy
|
|
|
7,341
|
|
|
|
7,567
|
|
|
|
-3.0
|
%
|
Other Revenues
|
|
|
250
|
|
|
|
222
|
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Revenues
|
|
|
13,046
|
|
|
|
16,584
|
|
|
|
-21.3
|
%
|
Costs and expenses
|
|
|
(13,999
|
)
|
|
|
(17,750
|
)
|
|
|
-21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
(953
|
)
|
|
|
(1,166
|
)
|
|
|
18.3
|
%
|
Interest expense - net
|
|
|
(221
|
)
|
|
|
(217
|
)
|
|
|
1.8
|
%
|
Ganin on extinguishment of debt
|
|
|
46
|
|
|
|
0
|
|
|
|
NA
|
|
Gain on sale of assets
|
|
|
22
|
|
|
|
1
|
|
|
|
2100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning (Loss) from continuing operations before income taxes
|
|
$
|
(1,106
|
)
|
|
$
|
(1,382
|
)
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Facilities Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital and Nursing Home Admissions
|
|
|
124
|
|
|
|
269
|
|
|
|
-54
|
%
|
Nursing Home Patient Days
|
|
|
14,433
|
|
|
|
14,521
|
|
|
|
-1
|
%
|
16
Results of Operations
Healthcare Facilities Segment Net Revenues
The following table sets forth the percentage of net patient revenues from major payors for the Healthcare Facilities Segment for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Source:
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
37.9
|
%
|
|
|
37.1
|
%
|
Medicaid
|
|
|
46.5
|
%
|
|
|
30.8
|
%
|
Managed Care Insurance & Other
|
|
|
13.4
|
%
|
|
|
25.3
|
%
|
Self-pay
|
|
|
2.2
|
%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
The Healthcare Facilities Segment in the current year is composed of two nursing homes, one hospital and two
leased medical office buildings. During the three months ended September 30, 2015, the segment operated a second hospital on the same site as one of the nursing home, but closed this hospital in June 2016. Healthcare Facilities net revenues
decreased $3,340 for the three months ended September 30, 2016, compared to the prior year period primarily as a result of closing a hospital. Excluding the closed hospital from the prior year net revenues, the net revenues increased $255 in the
current year. Net revenues from all payer sources decreased compared to last year.
Pharmacy Segment Net Revenues
Pharmacy Segment net revenues for the three months ended September 30, 2016 decreased $226, or 3%, from the three months ended September 30,
2015. The decrease was a result of a 14% decrease in Durable Medical Equipment (DME) partially offset by a 3% increase in Institutional Pharmacy net revenues and a 1% increase in Retail Pharmacy net revenues. DME net revenues decreased
primarily due to the negative effect of the expansion in January 2016 of Medicare Competitive Bidding in its service area. The average net revenue per DME sales order decreased 15% in the current year, primarily due to the Competitive Bidding
expansion.
Healthcare Facilities Segment Cost and Expenses
Costs and expenses for our Healthcare Facilities Segment, including depreciation and amortization, were $5,377 and $9,293 for the three months
ended September 30, 2016 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
as a % of Net Revenues
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Salaries, wages and benefits
|
|
|
64.3
|
%
|
|
|
67.4
|
%
|
Supplies
|
|
|
7.4
|
%
|
|
|
10.1
|
%
|
Purchased services
|
|
|
8.4
|
%
|
|
|
8.0
|
%
|
Other operating expenses
|
|
|
14.7
|
%
|
|
|
17.0
|
%
|
Rent and lease expense
|
|
|
0.6
|
%
|
|
|
1.1
|
%
|
Depreciation and amortization expense
|
|
|
3.2
|
%
|
|
|
2.1
|
%
|
All expense categories except purchased services and depreciation and amortization decreased as a percentage
of net revenues for the three months ended September 30, 2016. Purchased services expense decreased $244, or 35%, in the current year but the lower net revenues resulted in the percentage increase. Similarly, depreciation and amortization expense
decreased $8 this year. The $3,916 decrease in costs and expenses is due to the closure of one hospital included in the three months ended September 30, 2015.
17
Pharmacy Segment Cost and Expenses
Cost and expenses for our Pharmacy Segment, including depreciation and amortization, were $7,533 and $7,646 for the three months ended
September 30, 2016 and 2015, respectively.
|
|
|
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
as a % of Net Revenues
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Cost of goods sold
|
|
|
63.2
|
%
|
|
|
60.8
|
%
|
Salaries, wages and benefits
|
|
|
25.4
|
%
|
|
|
24.7
|
%
|
Provision for bad debts
|
|
|
1.2
|
%
|
|
|
2.9
|
%
|
Supplies
|
|
|
0.5
|
%
|
|
|
0.3
|
%
|
Purchased services
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Other operating expenses
|
|
|
3.8
|
%
|
|
|
4.5
|
%
|
Rent and lease expense
|
|
|
1.1
|
%
|
|
|
1.2
|
%
|
Depreciation and amortization expense
|
|
|
3.5
|
%
|
|
|
2.6
|
%
|
Cost of goods sold as a percent of net revenues increased in the three months ended September 30, 2016 as
compared to the comparable periods of the prior year due to cost of certain generic drugs and sales product mix for the current period.
Salaries, wages and benefits as a percent of net revenues increased in the three month period ended September 30, 2016 due to lower net
revenues although actual expense decreased $5 in the current year. Provision for bad debts decreased during the current year due to improved credit and collections practices. Depreciation and amortization expense increased $56 this year due to
increased depreciation for capitalized rental DME.
Operating Profit and Loss
The Company reported an operating loss of $953 for the three months ended September 30, 2016 compared to an operating loss of $1,166 for the
three months ended September 30, 2015. The lower operating loss for the three months ended September 30, 2016 compared to the operating loss for the prior years three month period resulted from the closure of one hospital in June 2016.
Interest Expense
Interest expense
was $221 and $217 for the three months ended September 30, 2016 and 2015, respectively. A gain on extinguish of debt of $46 for the three months ended September 30, 2016 resulted from accrued interest forgiveness by the debt holder as a
condition of early repayment of $1,508 of debt.
Income Taxes
Income tax expense of $144 ($210 federal tax expense and $66 state tax benefit) and income tax benefit of $249 ($229 federal tax benefit and
$20 state tax benefit) was recorded for continuing operations for the three months ended September 30, 2016 and 2015, respectively.
In
accordance with the Financial Accounting Standards Board Accounting Standards Codification (ASC) 740, we evaluate our deferred taxes quarterly to determine if adjustments to our valuation allowance are required based on the consideration
of available positive and negative evidence using a more likely than not standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, our historical operating results, our
expectation of future results of operations, the duration of applicable statuary carryforward periods and conditions of the healthcare industry. The ultimate realization of our deferred tax assets depends primarily on our ability to generate
future taxable income during the periods in which the related temporary differences in the financial basis and the tax basis of the assets become deductible. The value of our deferred tax assets will depend on applicable income tax rates.
18
At September 30, 2016, consistent with the above process, we evaluated the need for a valuation
against our deferred tax assets and determined that it was more likely than not that none of our deferred tax assets would be realized. As a result, in accordance with ASC 740, we recognized a valuation allowance of $10,818 against the deferred tax
asset so that there is a net deferred income tax liability of $378 at September 30, 2016. A $378 net deferred long-term income tax liability is recorded at September 30, 2016 as required under the intraperiod income tax allocation requirements of
ASC 740. We conducted our evaluation by considering available positive and negative evidence to determine our ability to realize our deferred tax assets. In our evaluation, we gave more significant weight to evidence that was objective in
nature as compared to subjective evidence. Also, more significant weight was given to evidence that directly related to our current financial performance as compared to less current evidence and future plans.
The principal negative evidence that led us to determine at September 30, 2016 that all the deferred tax assets should have a full valuation
allowances of the net deferred income tax assets was the three-year cumulative pre-tax loss from continuing operations as well as the underlying negative business conditions for rural healthcare businesses in which our Healthcare Facilities Segment
businesses operate. The deferred income tax liability of $378 at September 30, 2016 will be adjusted quarterly as required under the requirements for intraperiod income tax allocation of ASC 740.
For Federal income tax purposes, at September 30, 2016, the Company had approximately $10,000 of estimated net operating loss carry-forwards
available for use in future years subject to the limitations of the provisions of Internal Revenue Code Section 382.
Loss from Continuing Operations
before Income Tax
Loss from continuing operations before income tax of $1,106 for the three months ended September 30, 2016
compared to a loss from continuing operations before income tax of $1,382 for the three months ended September 30, 2015. Despite the $3,538 decrease in net revenues in the three months ended September 30, 2016 when compared to the same quarter last
year, the $576 reduction in Healthcare Facilities Segments operating loss, offset by an increase of $113 in operating loss by the Pharmacy Segment and $250 in operating loss by Corporate and Other, resulted in the $213 reduced loss from
continuing operations this year compared to last year. The $250 increase in Corporate and Other operating loss resulted from increased legal expenses needed for the defense of a lawsuit.
Earnings (Loss) After Taxes
Loss
from continuing operations was $1,250 (a loss of $0.13 per fully diluted share) for the three months ended September 30, 2016 compared to a loss from continuing operations of $1,133 ($0.12 per fully diluted share) for the three months
ended September 30, 2015. The increased loss in the current year resulted from $144 income tax expense in the three months ended September 30, 2016 which compares to the $535 income tax benefit recorded in the three months ended September 30,
2015 as a result of the $4,273 deferred income tax valuation analysis this year.
Earnings from discontinued operations of $4,273
(including a gain on sale of Chestatee of $7,246 and income tax expense of $2,634) for the three months ended September 30, 2016, which compares to a loss from discontinued operations of $535 for the three months ended September 30, 2015. The
Net income for the three months ended September 30, 2016 was $3,023 (or $0.32 fully diluted share) compared to net loss of $1,668 (a loss
of $0.18 earnings per fully diluted share) for the three months ended September 30, 2015.
Adjusted 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
19
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 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 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 Healthcare Facilities Segment Adjusted EBITDA and 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, without gains on sales of businesses and without any allocation of the non-cash adjustments, which we also report as a separate line item in Adjusted EBITDA. Net
cash used in operations for the three months ended September 30, 2016 and 2015, respectively, is shown below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Healthcare Facilities Adjusted EBITDA
|
|
$
|
251
|
|
|
$
|
(317
|
)
|
Pharmacy Adjusted EBITDA
|
|
|
62
|
|
|
|
119
|
|
Corporate overhead costs
|
|
|
(822
|
)
|
|
|
(541
|
)
|
Taxes and interest expense
|
|
|
(365
|
)
|
|
|
32
|
|
Other non-cash expenses and net change in operating assets and liabilities
|
|
|
(2,316
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
$
|
(3,190
|
)
|
|
$
|
(815
|
)
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Overview
Our primary source of
liquidity is the cash on hand of $12,801 at September 30, 2016. Currently, the Companys ability to raise capital (debt or equity) in the public or private markets on what it considers acceptable terms is uncertain. We nevertheless periodically
seek options to obtain financing for the liquidity needs of the Company or individual subsidiaries. The Company and its subsidiaries currently are funding working capital needs primarily from cash on hand and from the sale of assets. See
Subsidiary Loans below.
The Company believes its Healthcare Facilities Segment and its Pharmacy Segment business continue to
underperform. The Company has incurred losses from continuing operations in eight of the last nine fiscal quarters through the quarter ending September 30, 2016. See the Business Strategy: Operations, Dispositions and Acquisitions
discussion earlier in this Item 2.
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.
Subsidiary Loans
Trace RDA Loan and Trace Working Capital Loan
On July 11, 2012, SunLink and two wholly owned subsidiaries of the
Company, closed on a $9,975 Mortgage Loan Agreement (Trace RDA Loan) and a Working Capital Loan Agreement (Trace Working Capital Loan), both dated as of July 5, 2012.
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% (6.0% at September 30, 2016). The Trace RDA Loan is collateralized by real estate and equipment of Trace Regional
Hospital (Trace) in Houston, MS and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program.
20
The Trace Working Capital Loan as amended provided for a revolving line of credit which expired
on July 2, 2016 and was not renewed. At June 30, 2016, there were no outstanding borrowings under the Trace Working Capital Loan.
The Trace RDA Loan contains various terms and conditions, including financial restrictions and limitations, and affirmative and negative
covenants. The covenants include financial covenants measured on a quarterly basis which require Trace to comply with a ratio of current assets to current liabilities, debt service coverage, fixed charge ratio, and funded debt to EBITDA, all as
defined in the Trace RDA Loan. At September 30, 2016 and June 30, 2016, Trace was not in compliance with the debt service coverage, fixed charge ratio and funded debt to EBITDA ratios. No modification or waiver for the September 30, 2016 nor the
June 30, 2016 non-compliance has been obtained as of November 10, 2016 and the indebtedness of $7,575 as of September 30, 2016 and $7,698 as of June 30, 2016 are presented in current liabilities in the condensed consolidated balance sheets for
these dates. The Company is discussing a modification or waiver of this non-compliance with the lender. The ability of Trace to continue to make the required debt service payments under the Trace RDA Loan depends on, among other things, its ability
to generate sufficient cash flows, including from operating activities. If Trace is unable to generate sufficient cash flow from operations to meet debt service payments on the Trace RDA Loan, including in the event the lender were to declare
an event of default and accelerate the maturity of the indebtedness, such failure could have material adverse effects on the Company. The Trace RDA Loan is guaranteed by the Company and one subsidiary.
SHPP RDA Loan
On November 6, 2012, SunLink Healthcare Professional Property, LLC SHPP, a subsidiary of the
Company, entered into and closed on a $2,100 term loan dated as of October 31, 2012 (the SHPP RDA Loan). SHPP owns and leases a medical office building to Southern Health Corporation of Ellijay, Inc. (SHC
Ellijay). SHC Ellijay owns and operates North Georgia Medical Center (North Georgia), located in Ellijay, Georgia.
The SHPP RDA Loan has a term of 25 years with monthly payments of principal and interest until repaid. The SHPP RDA Loan bears
interest at a floating rate of interest equal to the greater of (i) the prime rate (as published in The Wall Street Journal) plus 2.0%, or (ii) 5% (5.50% at September 30, 2016). The SHPP RDA Loan is collateralized by SHPPs
real estate, equipment and leases and is partially guaranteed under the U.S. Department of Agriculture, Rural Development Business and Industry Program. The SHPP RDA Loan contains certain financial covenants with respect to the ratio of
current assets to current liabilities and debt service coverage, all as defined in the SHPP RDA Loan Agreement, which SHPP must maintain and that are measured at the end of each fiscal year. The SHPP RDA Loan is guaranteed by the
Company and one subsidiary. SHPP has entered into an agreement to sell the medical office which is the collateral under this loan, and the loan will be paid off upon the sale, if it is consummated.
Carmichael Notes
On April 22, 2008, SunLink Scripts Rx, LLC issued a $3,000 promissory note with an interest rate of
8% to the former owners of Carmichael as part of the acquisition purchase price (the Carmichael Notes). The Carmichael Notes, as amended, were payable in semi-annual installments of $185 of principal and plus accrued interest, with the
remaining balance of $1,255 due October 22, 2017. Under an agreement dated September 9, 2016, between the Company and the Note holders, the Carmichael Notes balance of $1,508 was paid in full on September 9, 2016 and the accrued interest
payable to that date of $46 was forgiven. A gain on retirement of debt of $46 for the three months ended September 30, 2016 was reported for the interest payable forgiveness.
21
Contractual Obligations, Commitments and Contingencies
Contractual obligations, commitments and contingencies related to long-term debt, non-cancelable operating leases and interest on outstanding
debt from continuing operations at September 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in:
|
|
Long-Term
Debt
|
|
|
Operating
Leases
|
|
|
Interest on
Outstanding
Debt
|
|
1 year
|
|
$
|
7,637
|
|
|
$
|
461
|
|
|
$
|
419
|
|
2 years
|
|
|
51
|
|
|
|
368
|
|
|
|
103
|
|
3 years
|
|
|
47
|
|
|
|
303
|
|
|
|
101
|
|
4 years
|
|
|
49
|
|
|
|
255
|
|
|
|
98
|
|
5+ years
|
|
|
1,758
|
|
|
|
74
|
|
|
|
847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,542
|
|
|
$
|
1,461
|
|
|
$
|
1,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016, we had outstanding long-term debt of $9,542 of which $7,575 was incurred under the
Trace RDA Loan, $1,940 was incurred under the SHPP RDA Loan and $27 was related to other debt.
Discontinued Operations
Chestatee Hospital
On August 19, 2016, the Companys subsidiary Southern Health Corporation of Dahlonega, Inc.
(Chestatee) sold substantially all of the assets and certain liabilities of Chestatee Regional Hospital in Dahlonega, Georgia through an asset purchase agreement for $15,000 subject to adjustment for the book value of certain assets and
certain liabilities assumed at the sale date. The pre-tax gain on sale of $7,246 is subject to adjustment for various purchase price adjustments. Chestatee retained certain liabilities, including for employee related liabilities and certain Medicare
and Medicaid liabilities, relating to the period it owned and operated the hospital. A portion of the net proceeds have been used for the payment of debt and the balance will be retained for working capital and general corporate purposes. The
assets sold and liabilities assumed are shown as assets held for sale in the condensed consolidated balance sheet as of June 30, 2016.
Other Sold Hospitals
Subsidiaries of the Company have sold substantially all of the assets of three hospitals
(Other Sold Hospitals) during the period July 2, 2012 to December 31, 2014. Certain assets and liabilities were retained in these sales and the results of the retained assets and liabilities are classified as discontinued operations
in our condensed consolidated financial statements for the three month periods ended September 30, 2016 and 2015. The loss before income taxes of the Other Sold Hospitals results primarily from negative prior year Medicare and Medicare cost report
settlements.
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 three months ended September 30, 2016 and 2015.
Related Party
Transactions
A director of the Company and the Companys former corporate secretary are members of two different law firms,
each of which provides services to SunLink. The Company has expensed an aggregate of $197 and $84 for legal services to these law firms in the three months ended September 30, 2016 and 2015, respectively. Included in the Companys
condensed consolidated balance sheets at September 30, 2016 and June 30, 2016 is $168 and $75, respectively, of amounts payable to these law firms.
.
22