9. VARIABLE INTEREST ENTITY

3 Months Ended

Jun. 30, 2012

Notes to Financial Statements

NOTE 9 - VARIABLE INTEREST ENTITY

Concurrent with the close of the Acquisition, PCHI simultaneously acquired title to substantially all of the real property acquired by the Company in the Acquisition. The Company received $5.0 million and PCHI guaranteed the Company's $45.0 million Loan. The Company remains primarily liable as the borrower under the $45.0 million Loan notwithstanding its guarantee by PCHI. The $45.0 million term loan is cross-collateralized by substantially all of the Company's assets and all of the real property of the Hospitals. All of the Company's operating activities are directly affected by the real property that was sold to PCHI, which is a related party entity that is affiliated with the Company through common ownership and control. As of June 30, 2012, PCHI was owned 51% by various physician investors and 49% by Ganesha Realty LLC (“Ganesha”), which is managed by Dr. Chaudhuri.

The Company entered into a lease agreement dated March 7, 2005 (amended and restated as of April 13, 2010) under which it leased back from PCHI all of the real estate that it transferred to PCHI (Note 13). The amended lease terminates on the 25-year anniversary of the original lease (March 7, 2005), grants the Company the right to renew for one additional 25-year period, and requires combined annual base rental payments of $8.3 million for all the properties. However, until PCHI refinances the related $45.0 million term loan, the annual base rental payments are reduced to $7.3 million. In addition, the Company offsets, against its rental payments owed to PCHI, interest payments that it makes on the related $45.0 million term loan. Lease payments to PCHI and offsetting interest payments are eliminated in consolidation.

GAAP defines variable interest entities (“VIE”) as entities with a level of invested equity that is not sufficient to fund future activities to permit them to operate on a stand-alone basis, or whose equity holders lack certain characteristics of a controlling financial interest. Then, for entities identified as a VIE, the guidance sets forth a model to a primary beneficiary based on an assessment of which party to a VIE, if any, bears a majority of the exposure to expected losses, or stands to gain from a majority of its expected returns and has the power to direct activities of the VIE that impacts economic performance. The primary beneficiary of a VIE should consolidate the VIE.

The Company determined that it provides the majority of financial support to PCHI through various sources including lease payments, remaining primarily liable under the $45.0 million term loan, and cross-collateralization of the Company's non-real estate assets to secure the $45.0 million term loan. The Company concluded that PCHI is a VIE and it is the primary beneficiary. Accordingly, the financial statements of PCHI are included in the accompanying unaudited condensed consolidated financial statements.

PCHI's assets, liabilities, and deficiency are set forth below.

	June 30, 2012			March 31, 2012
Cash	$	266		$	68
Property, net		40,662			40,984
Other		283			207
Total assets	$	41,211		$	41,259
Debt (as guarantor)	$	45,000		$	45,000
Other		544			641
Total liabilities		45,544			45,641
Deficiency		(4,333	)		(4,382	)
Total liabilities and accumulated deficit	$	41,211		$	41,259

As noted above, PCHI is a guarantor on the $45.0 million term loan should the Company not be able to perform.  PCHI's total liabilities represent the Company's maximum exposure to loss.

PCHI rental income and the Company’s related rental expense of $2.0 million and $1.9 million were eliminated upon consolidation for the three months ended June 30, 2012 and 2011, respectively.

The Company has a lease commitment to PCHI (Note 13). Additionally, the Company is responsible for seismic remediation under the terms of the lease agreement (Note 2).