4. COMMON STOCK WARRANTS

12 Months Ended

Mar. 31, 2013

Common Stock Warrants

NOTE 4 - COMMON STOCK WARRANTS

NOTE 4 - COMMON STOCK WARRANTS

A summary of warrant activity for the years ended March 31, 2013 and 2012 is presented as follows.

				Weighted-
	Shares issuable			average		Expiration
	under warrants			exercise price		date
Outstanding, March 31, 2012 and 2011		405,000		$	0.07		April 13, 2013
Repurchased		(16,800	)	$	0.07		April 13, 2013
Issued		16,800		$	0.07		April 13, 2016
Amended (old expiration date)		(388,200	)	$	0.07		April 13, 2013
Amended (new expiration date)		388,200		$	0.07		April 13, 2016
Outstanding, March 31, 2013		405,000		$	0.07		April 13, 2016

On April 13, 2010 the Company issued three-year warrants (the “Omnibus Warrants”) to purchase its common stock at an exercise price of $0.07 per share in the following denominations: 139.0 million shares to KPC or its designees and 96.0 million shares to Silver Point or its designees. The Omnibus Warrants also provide the holders with certain pre-emptive, information and registration rights. As of April 13, 2010, the Company recorded warrant expense and the related warrant liability of $2.9 million, representing fair value.  

In addition, on April 13, 2010, the Company issued a three-year warrant (the “Release Warrant”) to acquire up to 170.0 million shares of common stock at $0.07 per share to Dr. Chaudhuri who facilitated the release (see “DEBT”) enabling the Company to recover amounts due from its prior lender and a $1.0 million reduction in principal of its outstanding debt, among other benefits to the Company.  The Release Warrant also provides the holder with certain pre-emptive, information and registration rights. During the year ended March 31, 2010, the Company recorded the fair value of $2.1 million as an offsetting cost of the recovery.  

On February 7, 2013, in connection with the Restated Credit Agreement, the Company entered into the following transactions involving warrants:

The Company entered into a Warrant Repurchase Agreement with SPCP Group IV, LLC pursuant to which it repurchased the outstanding common stock warrant issued to SPCP Group IV, LLC on or about April 13, 2010 (the “Cancelled Warrant”). The Cancelled Warrant (part of the Omnibus Warrants) entitled the holder to purchase an aggregate of 16.8 million shares of the Company’s common stock at an exercise price of $0.07 per share. The Company repurchased the Cancelled Warrant for a purchase price of $0.12 per share minus the exercise price of $0.07 per share resulting in a net purchase price of $0.05 per share multiplied by 16.8 million shares for an aggregate purchase price of $840.9.

Immediately following the warrant repurchase, the Company issued a new common stock warrant (the “New Warrant”) to SPCP Group, LLC for a price of $0.05 per share (an aggregate price of $840.9) on the same terms as the Cancelled Warrant entitling the holder to purchase an aggregate of 16.8 million shares of common stock at an exercise price of $0.07 per share, except that the New Warrant expires on April 13, 2016.

Also simultaneous with the transactions described above, the Company extended the expiration date from April 13, 2013 to April 13, 2016 for the Omnibus Warrants issued to KPC and the remaining held by Silver Point (to purchase 79.2 million shares) and the Release Warrant issued to Dr. Chaudhuri. The extension of the warrant expiration date was intended to conform the terms of the warrants to that of the Restated Credit Agreement.

The Company assessed the amended credit agreement entered into in August 2012 and February 2013 under the provisions of ASC 470-50 and determined that the debt amendments should be accounted for as a debt modification. Accordingly, the recorded change in fair value as of February 7, 2013, totaling $534, of the New Warrant and the Omnibus Warrant held by SPCP Group, LLC was recognized as a component of the debt discount on the Term Loan (Note 3) and will be amortized to interest expense over the term of the debt agreement using the effective interest method.

The warrant expense relating to the Release Warrant and the Omnibus Warrant held by Dr. Chaudhuri for the years ended March 31, 2013 and 2012 was $1.7 million and $0, respectively. The change in fair value of the Release Warrant and the Omnibus was immediately charged to expense.

The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the “IHHI Warrants.” As of March 31, 2013, the fair value of the IHHI Warrants was $5.3 million.

The net loss related to the change in fair value of the IHHI Warrants for the year ended March 31, 2013 and 2012 was $1.4 million and $1.5 million, respectively. The total loss on warrants was $3.1 million and $1.5 million for the years ended March 31, 2013 and 2012, respectively.

The fair value of warrants issued by the Company is estimated using the Black-Scholes valuation model, which it believes is the appropriate valuation method under the circumstances. Since the Company’s stock is thinly traded, the expected volatility is based on an analysis of its stock and the stock of eight other publicly traded companies that own hospitals.

The risk-free interest rate is based on the average yield on U.S. Treasury notes with maturity commensurate with the terms of the warrants. The dividend yield reflects that the Company has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future.  The assumptions used in the Black-Scholes valuation model are as follows:

	March 31, 2013		February 7, 2013		March 31, 2012
Expected dividend yield		0.0%		0.0%		0.0%
Risk-free interest rate		0.4%		0.4%		0.2%
Expected volatility		39.9%		40.3%		57.3%
Expected term (in years)		3.05		3.18		1.04