MEDCATH CORP - 10-K Annual Report

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. þ Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s 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. þ

As of December 16, 2002, there were 18,011,520 shares of the Registrant’s Common Stock outstanding. The aggregate market value of the Registrant’s Common Stock held by non-affiliates as of December 16, 2002 was approximately $59.8 million (computed by reference to the closing sales price of such stock on the Nasdaq National Market® on such date).

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Stockholders to be held on March 5, 2003 are incorporated by reference into Part III of this Report

Some of the statements and matters discussed in this report and its exhibits constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. The forward-looking statements contained in this report and its exhibits include, among others, statements about the following:


	•	demographic changes,

	•	changes in medical or other technology,

	•	changes in Medicare and Medicaid payment levels,

	•	our ability, when appropriate, to enter into managed care provider arrangements and the terms of those arrangements,

	•	our ability to successfully develop additional hospitals, open them according to plan and gain significant market share in the market,


	•	the availability and terms of capital to fund our development strategy,

	•	our relationships with physicians who use our hospitals,

	•	our ability to attract and retain nurses and other qualified personnel to provide quality services to patients in our hospitals,

	•	competition from other hospitals,

	•	existing governmental regulations and changes in, or failure to comply with, governmental regulations,

	•	our information systems,

	•	changes in generally accepted accounting principles, and

	•	liability and other claims asserted against us.

Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. Other than as may be required by federal securities laws to disclose material developments related to previously disclosed information, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

An investment in our common stock involves a high degree of risk. You should consider carefully all of the information contained in this report and, in particular, the discussion of risk factors filed as Exhibit 99.1 to this report, before making an investment decision with respect to our common stock.

Concurrent with our initial public offering in July 2001, we completed a series of transactions that we undertook to prepare for the offering and to increase our ownership interest in some of our hospitals. First, we established MedCath Corporation as our new holding company by issuing shares of its common stock in exchange for all of the outstanding shares of common stock of our predecessor holding company, MedCath Holdings, Inc. Second, we completed a series of transactions in which we issued shares of our common stock valued at the public offering price and paid cash to acquire additional ownership interests in five of our hospitals from our physician and hospital partners in each of those hospitals. As a result of these transactions, we began consolidating in our financial statements one of these hospitals for which we had previously been required to use the equity method of accounting.

References in this report to “we,” “us” and “our” for periods prior to July 27, 2001 are references to our holding company prior to the transactions described above, MedCath Holdings, Inc., its subsidiaries and unconsolidated affiliates, including each of our hospitals, and “our predecessor company,” unless the context requires otherwise. For periods subsequent to July 27, 2001, references to “we,” “us” and “our” are references to our holding company after the transactions described above, MedCath Corporation, its subsidiaries and unconsolidated affiliates, including each of our hospitals, unless the context requires otherwise. References in this report to our predecessor company are to MedCath Incorporated, which was acquired from its public stockholders in July 1998 by several private investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe, and members of our management team.

We focus primarily on the diagnosis and treatment of cardiovascular disease. We design, develop, own and operate hospitals in partnership with physicians that we believe have established reputations for clinical excellence, most of whom are cardiologists and cardiovascular surgeons. While each of our hospitals is a freestanding, licensed general acute care hospital that includes an emergency department or chest pain clinic, operating rooms, catherization laboratories, pharmacy, laboratory, radiology department, cafeteria and food service and is capable of providing a full complement of health services, we focus primarily on serving the unique needs of patients suffering from cardiovascular disease. The medical staff at each of our hospitals is open to all qualified physicians performing healthcare services in the market, except for certain hospital-based physicians such as anesthesiologists, radiologists, and emergency physicians. We are also committed to improving the productivity and work environment of physicians, nurses and other medical personnel providing care. As of September 30, 2002, we owned and operated eight hospitals, together with our physician partners, who own an equity interest in the hospital where they practice, as well as other investors. On October 2, 2002, we opened our newest hospital in Harlingen, Texas, which increased our total number of owned and operated hospitals to nine. The Harlingen Medical Center focuses on cardiovascular care as well as orthopedics, neurology, obstetrics and gynecology. Our existing nine hospitals have a total of 577 licensed beds and are located in Arizona, Arkansas, California, New Mexico, Ohio, South Dakota and Texas. We have begun developing our tenth hospital, which will be a heart hospital located in St. Tammany Parish just north of New Orleans, Louisiana, our eleventh hospital, which will be a heart hospital located in San Antonio, Texas, our twelfth hospital, which will be a heart hospital located in the city of Glendale, near Milwaukee, Wisconsin, and our thirteenth hospital, which will be a heart hospital located in Lafayette, Louisiana. We expect to open these new hospitals during March 2003 (St. Tammany Parish), the late summer of 2003 (San Antonio), and the fall of 2003 (Glendale and Lafayette). These new hospitals are expected to have a total of 182 licensed beds. Our hospital division accounted for 83.7% of our net revenue for our fiscal year ended September 30, 2002.

In addition to our hospitals, we provide cardiovascular care services in diagnostic and therapeutic facilities located in eight states and through mobile cardiac catheterization laboratories. Our mobile diagnostic facilities are typically leased to hospitals and used by physicians to evaluate the functioning of patients’ hearts and coronary arteries and serve areas that do not have the patient volume to support a full-time facility. We also provide consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.

Our predecessor company was developed in late 1988 and 1989 by our chairman and our president and chief executive officer and for a number of years was primarily engaged in operating mobile and other cardiac catheterization laboratories. In 1994, our predecessor company conducted an initial public offering and began developing its first hospital, which opened in 1996. By July 1998, the predecessor company had developed and opened three additional heart hospitals. At that time, several private investment partnerships sponsored by Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson & Stowe, and members of our management team acquired our predecessor company from its public stockholders. While operating as a private company, we:


	•	opened five new hospitals, four of which were already under development at the time of the going private transaction, and sold one hospital,

	•	improved our process for developing new hospitals,

	•	began developing two additional hospitals,

	•	standardized and, when appropriate, centralized our operations across financial and operational areas, and

	•	continued to strengthen our regulatory compliance program at the facility and corporate levels.

In July 2001, we completed an initial public offering and the transactions described in the introductory notes on the immediately preceding page of this report. Through these transactions we:


	•	raised approximately $137.0 million of net proceeds; and

	•	increased our ownership interests in five of our hospitals, including one hospital which we began to consolidate in our financial statements based on obtaining a majority ownership position and substantive control of that hospital.

Of the total $137.0 million in net proceeds we received from the public offering, we immediately used approximately $25.4 million to increase our ownership interest in five of our hospitals and approximately $18.0 million to pay all amounts outstanding under our $100.0 million credit facility. In October 2001, we used $17.4 million of the net proceeds from the offering to increase our ownership interest in Heart Hospital of New Mexico. That acquisition increased our ownership interest in Heart Hospital of New Mexico from a 24.0% minority interest to a 69.0% majority interest ownership position, giving us substantive control of the hospital. Accordingly, we began to consolidate in our financial statements the hospital’s results of operations and financial position beginning October 1, 2001, the date of acquisition. We have also invested approximately $14.1 million of the net proceeds from the public offering in our hospital development program. We expect to use the remaining approximate $62.1 million of the net proceeds from the offering to finance the development of additional hospitals and for working capital and other corporate purposes, including the possible acquisition of additional interests in our existing hospitals. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the use of the net proceeds from the offering. Pending those uses, we are investing the funds, along with our operating cash, in money market funds or similar short-term interest bearing, investment-grade securities, which we include in cash and cash equivalents in our consolidated balance sheet.

In July 2001, we also became a party to a new $189.6 million credit facility, which provided a source of capital to refinance approximately $79.6 million of indebtedness of some of our existing hospitals and provided us with an additional $110.0 million of available capital to partially finance real estate acquisition, construction and related costs for our hospital development program. As of September 30, 2002, $63.0 million of the initial $110.0 million had been designated or borrowed to finance the development of Harlingen Medical Center and Louisiana Heart Hospital. In November 2002, an additional $31.6 million was designated for use in funding the development of Heart Hospital of San Antonio. The remaining $15.4 million is available to finance other projects in our hospital development program.

The American Heart Association estimates that total domestic expenditures for the treatment of cardiovascular disease were approximately $199.5 billion in 2002 and that these expenditures have grown at a rate of 5.8% annually since 1997. Of these expenditures, 63.2%, or approximately $126.1 billion, was spent on hospital and other facility-based charges. Cardiovascular disease is a progressive illness that develops without symptoms over a number of years and frequently goes undiagnosed until the patient suffers an acute episode such as a stroke or heart attack. Cardiovascular disease includes coronary heart disease, hypertensive disease — which is a risk factor for more serious cardiovascular diseases — rheumatic fever/rheumatic heart disease, stroke and congenital cardiovascular defects. The American Heart Association estimates that approximately 61.8 million Americans have one or more types of cardiovascular disease. Cardiovascular disease claimed 960,000 lives, representing 40.1% of all deaths, in the United States in 1999. This represented 116,800 more lives than the next five leading causes of death combined, including cancer, chronic obstructive pulmonary disease, accidents, pneumonia/influenza and diabetes mellitus.

Most of the invasive procedures physicians perform to treat patients with cardiovascular disease, such as coronary artery angioplasties with stent placement and coronary artery bypass graft surgery, are performed in hospitals on an inpatient basis. Cardiovascular disease creates the largest demand for hospital bed use in the United States, being the first listed diagnosis of 6.3 million inpatients in 1999. Approximately 12.6 million of the estimated 61.8 million Americans suffering from cardiovascular disease have coronary heart disease, which generates the single greatest demand for cardiac diagnostic and therapeutic procedures.

According to the American Heart Association, it is estimated that physicians performed the following number of procedures to diagnose and treat cardiovascular disease in 1999:


	•	571,000 coronary artery bypass graft operations,

	•	601,000 coronary artery angioplasty procedures,

	•	1.4 million inpatient cardiac catheterization procedures, and

	•	472,000 outpatient cardiac catheterization procedures.

The demand for cardiology and cardiovascular disease diagnosis and treatment procedures is expected to increase in the future as people age 55 and older, the primary recipients of cardiac care services, increase in number and represent a growing proportion of the total population. According to the 2000 census by the U.S. Census Bureau, the proportion of Americans over age 55 was 21.1% and is expected to increase to 27.5% by

2015. Additionally, demand for cardiac care services continues to grow as a result of advances in technology. Medical devices in development are expected to increase the options available to physicians to treat cardiovascular disease and increase the number of procedures performed.

We focus primarily on the diagnosis and treatment of cardiovascular disease. We develop, own and operate hospitals in partnership with physicians with the goal of improving the quality of care and enhancing the overall experience of patients and physicians. Key elements of our strategy include:


	We design and operate our hospitals with a focus primarily on serving the unique needs of patients suffering from cardiovascular disease and improving the work environment of physicians, nurses and other medical personnel providing care. We have developed an innovative facility design and infrastructure specifically tailored to the cardiovascular care delivery system that combines staff, equipment and physical layout to deliver high-quality, cost-effective care. Because the clinical protocols and procedures for treatment of patients with cardiovascular disease are generally the same throughout the United States, we are able to use our standard facility design — with only small variations — in each of the markets in which we develop a hospital.

	By focusing primarily on a single disease category, we are able to schedule patient procedures more efficiently and allow our physicians, nurses, medical technicians and other staff members to concentrate on and enhance their professional cardiovascular care skills, thereby better serving the needs of patients in the community. We are also able to invest our available funds primarily in equipment and technology for cardiovascular care, rather than allocating those funds among the equipment and technology needs of many different healthcare services as occurs at general acute care hospitals. We believe our focused approach increases patient, physician and staff satisfaction and allows us to provide high-quality, cost-effective patient care.


	Our philosophy, developed in partnership with physicians, is to center care around the patient rather than expect the patient to adapt to our facilities and staff. We have designed our hospitals, particularly the patient rooms, around the requirements of our patients in order to improve their experience and the quality of their care. Our large, single-patient rooms are capable of handling all of our patients’ needs during their entire stay, including critical care, telemetry and post-surgical care. This allows us to avoid moving our patients repeatedly and to have their care provided by the same group of staff members during their entire stay. For patients and their families, this creates a familiarity with, and a high level of trust in, their care providers while enabling the care providers to understand each patient’s needs on an individual basis. The design of our rooms and our unlimited visiting hours also allow patients’ family members to be involved in their care. For example, the size of our patient rooms lets us provide sleeping arrangements for family members who desire to stay with the patient during the patient’s recovery. In most general acute care facilities, which have a limited number of rooms with cardiovascular monitoring capabilities, patients are required to be transferred repeatedly within the facility during the course of their stay. Moving patients almost always involves risk to the patient, new care providers and an unsettling reorientation period for the patient and the patient’s family. We believe moving patients also reduces physician efficiency, results in delays in providing the services patients need and can lead to a longer patient stay.

	We believe our patient care staffing ratios are equal to or better than those of our competitors. We also believe that our patient care staff is more available to our patients because of our unique facility design and our investments in technology. For example, we invest in technology that facilitates communication between patients and care providers by:


	•	allowing patients and their family members to easily contact and directly communicate with specific members of the nursing staff regardless of where the nurse is located at that time, and

	•	electronically providing information about the patient’s medical condition directly to the members of the nursing staff providing care to the patient rather than through a central monitoring station.


	We monitor and evaluate patient satisfaction in our hospitals by conducting patient surveys. These performance surveys have consistently demonstrated a high level of patient satisfaction with our facilities,

staff and care coordination. For example, in patient satisfaction surveys conducted in our hospitals, 98% of our patients who completed these surveys indicated that they would return to our hospital for any future cardiac procedures. And more than 98% indicated that they were satisfied with the physical comfort of our hospital, the patient education we provided and the way in which we allowed family members to be closely involved in their care.


	When we develop a hospital we form a venture with physicians, individually or in groups, practicing in the market where we plan to develop the hospital. In some instances, local market conditions have made it advantageous for us to organize a hospital with a community hospital investing as a partner in addition to physicians. We and our partners invest capital and own pro rata interests in the venture based upon the amount of capital contributed. We own between 51.0% and 70.9% of the equity of eight of the nine hospitals that we currently operate, and we own a minority interest in the other hospital, for which we are currently required to use the equity method of accounting. We own 51.0% or greater of each of our tenth, eleventh, twelfth, and thirteenth hospitals, which are currently under development.

	We partner with cardiologists, cardiovascular surgeons, and other physicians that we believe have established reputations for clinical excellence. These physician partners, who own an equity interest in the hospital where they practice, as well as other investors including other hospitals, participate in decisions on strategic matters at that hospital such as site selection, facility size and layout, the hospital marketing plan and community outreach programs. They, as well as the numerous other physicians providing services in our hospitals, also participate in decisions on a wide range of operational matters such as development of clinical care protocols, supply selection and usage, equipment purchases, patient procedure scheduling and local staff and management team selection. Our physician partners are empowered by their role in the development of a new hospital and in the strategic decisions affecting the hospital. We believe that our physician partners take greater pride and interest in a hospital they view as their own and that the influence they have over decisions in the hospital motivates them to provide patient-focused care on a cost-effective basis. The opportunity to have a role in how our hospitals are managed encourages our physician partners to share new ideas, concepts and practices.

We intend to begin development on one to three new hospitals annually in markets where we can establish relationships with highly regarded physicians, most of whom are cardiologists and cardiovascular surgeons. Before entering a new market, we use publicly available information to analyze a variety of factors, including licensing and regulatory (e.g., certificate of need requirements), growth characteristics, Medicare reimbursement rates and strengths and weaknesses of competing hospitals in the market. Our facility design for each new hospital focuses on improving physician and staff efficiency and providing higher quality patient care than is typically provided in general acute care facilities. We expect to leverage our experience and expertise from the development of our existing hospitals to continue to improve our hospital development program. All of our hospitals are designed for possible future expansion in an efficient and rapid manner.

We believe that by focusing primarily on diagnosing and treating cardiovascular disease we can improve the quality of cardiovascular care. We assess the quality of cardiovascular care — that is, the degree to which our services increase the likelihood of desired patient outcomes — by monitoring several key criteria, including mortality rates, patient acuity, average length of stay and patient satisfaction. We believe our hospitals generally achieve lower mortality rates and a shorter average length of stay for patients with generally higher acuity levels as compared to our competitors in each of our markets. We engaged the Lewin Group, a national health and human services consulting group, to conduct an objective study on cardiovascular patient outcomes, using publicly available Medicare data from 2000. The Lewin Group reviewed records for 1,139 hospitals that perform open heart surgery in the United States. The hospitals in this study included 193 Major Teaching hospitals with interns and residents-to bed of at least 0.25 and


	Peer Community hospitals, which include all other hospitals in the study. The Lewin study found the following:


	•	Length of stay — on average, our hospitals have a 17.4% shorter length of stay (adjusted for severity) for cardiac cases than Peer Community hospitals and a 22.4% shorter length of stay than Major Teaching hospitals.

	•	Mortality rates — after adjusting for risk of mortality, our hospitals, on average, exhibit 12.1% lower mortality rates than Peer Community hospitals and 9.4% lower mortality rates than Major Teaching hospitals.

	•	Severity case mix index — on average, patients arriving at our hospitals have a more severe case mix index of 1.48 compared to 1.19 at Peer Community hospitals and 1.26 at Major Teaching hospitals.


	We operate all of our hospitals under a quality improvement program to provide an objective assessment of the quality of the services we provide. All of our hospitals are accredited by the Joint Commission on Accreditation of Healthcare Organizations, an independent accrediting organization that is widely recognized in the hospital industry.

Our cost-effective operations reflect the impact of shared experiences of physicians and hospital management at each of our hospitals. We encourage our hospital management and physician partners to regularly share information and implement best practices, which is made easier by our standard facility design and operational similarities. We share information through regular meetings of our hospital management teams to enable them to discuss new practices and methodologies such as supply selection and management as well as scheduling efficiencies. We also coordinate opportunities for our physician partners to discuss — both on an informal basis and at our periodic meetings of our physician partners — such matters as clinical protocols, patient management and procedure techniques. These efforts have allowed our hospitals to benefit from the innovations that occur at one hospital and our hospital managers and physicians to become more efficient and productive.

We currently own and operate nine hospitals, including our newest hospital in Harlingen, Texas which opened on October 2, 2002. This hospital focuses on cardiovascular care as well as orthopedics, neurology, obstetrics and gynecology. We also currently have four hospitals under development, including a heart hospital in St. Tammany Parish just north of New Orleans, Louisiana, a heart hospital in San Antonio, Texas, a heart hospital in Glendale near Milwaukee, Wisconsin, and a heart hospital in Lafayette, Louisiana. We expect to begin development on one to three new hospitals each year. Once a new hospital venture is formed and the partners have contributed their capital, it typically takes 18 to 24 months to develop the hospital.

The following table identifies key characteristics of our nine hospitals in operation and the four hospitals we have under development, including our current ownership percentages.


(1)	Our ownership of Heart Hospital of New Mexico was 24.0% at September 30, 2001. Effective October 1, 2001, we increased our ownership interest to 69.0% by acquiring an additional 45.0% interest from our physician and hospital partners in this hospital venture. As a result of this increase to a majority ownership position, we obtained substantive control of the hospital and began to consolidate in our financial statements the hospital’s results of operations and financial position from October 1, 2001 (the first day of our fiscal year 2002).

(2)	After October 1, 2001, Heart Hospital of South Dakota is the only hospital in which we do not have a majority ownership interest. We use the equity method of accounting for this hospital, which means that we include in our consolidated statement of operations only a percentage of the hospital’s reported net income or loss for each reporting period.

(3)	As of December 16, 2002, the hospital was under development and is scheduled to open in the period indicated in the table.

Before designing and constructing our first hospital in 1994, we met frequently with our physician partners to analyze the operations, facilities and work flow of existing hospitals and found what we believed to be many inefficiencies in the way cardiovascular care was provided in existing hospitals. Based upon this analysis, we designed a hospital that we believed would enhance physician and staff productivity and allow for the provision of high-quality, patient-focused care. Based upon subsequent operating experience and input from physicians at our other hospitals, we have further refined our basic hospital layout to allow us to combine site selection, facility size and layout, staff and equipment to deliver quality cardiovascular care. We believe that a newly constructed and equipped hospital enjoys a significant competitive advantage over hospitals that have been repeatedly renovated and expanded over several decades, which often results in an inefficient layout and workflow. We also believe that a hospital and staff with a clear focus on diagnosing and treating cardiovascular disease can provide higher quality care and be more cost effective than general acute care hospitals that seek to provide multiple healthcare services to patients with a wide variety of diseases.

Universal patient rooms. Our large, single-patient rooms enable our staff to provide all levels of care required for our patients during their entire hospital stay, including critical care, telemetry and post-surgical care. Each room is equipped as an intensive care unit, which enables us to keep a patient in the same room throughout

their recovery. This approach differs from the general acute care hospital model of moving patients, potentially several times, as they recover from surgical procedures.

Centrally located inpatient services. We have centrally located all services required for inpatients, including radiology, laboratory, pharmacy and respiratory therapy, in close proximity to the patient rooms, which are usually all located on a single floor in the hospital. This arrangement reduces scheduling conflicts and patient waiting time. Additionally, this eliminates the need for costly transportation staff to move patients from floor to floor and department to department.

Distributed nursing stations. Unlike traditional hospitals with large central nursing stations which serve as many as 30 patients, we have corner configuration nursing stations on our patient floors where each station serves six to eight patients and is located in close proximity to the patient rooms. This design provides for excellent visual monitoring of patients, allows for flexibility in staffing to accommodate the required levels of care, shortens travel distances for nurses, allows for fast response to patient calls and offers proximity to the nursing station for family members.

Efficient work flow. We have designed and constructed our various procedure areas in close proximity to each other allowing for both patient safety and efficient staff work flow. For example, our cardiac catheterization laboratories are located only a few feet from the operating rooms, outpatient services are located immediately next to procedure areas and emergency services are located off the staff work corridor leading directly to the diagnostic and treatment areas.

Extra capacity for critical cardiac procedures. We design and construct our hospitals with more operating rooms and cardiac catheterization laboratories than we believe are available in the program of a typical general acute care hospital. This feature of our hospitals ensures that the physicians practicing in our hospitals will experience fewer conflicts in scheduling procedures for their patients. In addition, all of our operating rooms are designed primarily for cardiovascular procedures, which allows them to be used more efficiently by physicians and staff.

Our physician partners in our hospital ventures participate in the material strategic and operating decisions we make for a hospital. They do so either through their representatives on the governing board of the venture or through a requirement in the venture’s governing documents that we obtain the consent of their representatives before taking certain actions. In those ventures where we have a community hospital partner as well as physician partners, the community hospital partner also participates in these decisions, which include such matters as site selection, facility size and layout, and selection and employment of the key members of the hospital’s senior management team. After a hospital opens and begins operating, the members of the hospital’s senior management team make all routine operating decisions for the hospital. We must generally obtain the approval or consent, however, of our partners before taking action on matters such as adopting the hospital’s annual operating budget and making capital expenditures in excess of specified amounts. We must also generally obtain the consent of our partners or their representatives before making any material amendments to the operating or partnership agreement for the hospital venture or admitting additional members or partners. The operating or partnership agreement for each hospital venture contains provisions specifying the criteria for, and timing of, distributions to the partners as well as provisions limiting redemptions, and restricting the transfer, of ownership interests. In some of our hospital ventures, we must obtain the consent of our partners before making any distributions.

Our hospitals have different operating characteristics than traditional general acute care hospitals. For example, in our hospital division, our labor costs represent approximately 30% of our net revenue (based on our fiscal year ended September 30, 2002) as compared, we believe, to approximately 40% of net revenue in the average for-profit hospital and approximately 45% to 50% in the average not-for-profit hospital. We achieve our cost-effective operating results in a number of ways, including:


	•	designing our hospitals to reduce the labor costs associated with transporting patients, equipment and supplies. The delays and lack of coordination associated with transporting patients around a large general acute care hospital also hinders the physicians’ ability to provide quality care on a timely basis and can result in patient dissatisfaction,

	•	eliminating duplicative layers of administrative and support personnel,

	•	staffing our hospitals with only four non-caregiving executive employees including a president, vice president of finance, vice president of nursing and vice president of business development. This staffing model greatly reduces administrative costs associated with traditional general acute care hospitals,


	•	using working team leaders to supervise our nurses and medical technical personnel at each of our hospitals. These team leaders spend a majority of their time providing cardiovascular care services. This working team leader approach reduces the need for supervisory personnel,

	•	centralizing our non-clinical hospital support services such as finance, management information systems, regulatory compliance and managed care contracting, as appropriate, and

	•	investing in technology and training our physicians, nurses and other staff members so that they are familiar with all details of quality cardiovascular care, can work more efficiently and provide patient-focused care.

An important step in developing a new hospital is establishing relationships with physicians providing cardiovascular care that we believe have established reputations for clinical excellence. We regularly receive unsolicited inquiries from groups of physicians interested in partnering with us to take advantage of our hospital development and management expertise and access to capital. We also receive referrals to potential partners from our physician partners in our existing hospitals and from the leaders of physician groups to which we provide cardiovascular care consulting services. Our experience has been that physician groups most interested in partnering with us are those whose members wish to improve their current practice environment. Since these physicians frequently have pre-existing relationships with our existing physician partners in other markets, they can quickly conduct their own informal evaluation to understand the benefits of partnering with us to develop a hospital.

An equally important step in developing a new hospital is performing a detailed market analysis using publicly available data from a number of sources. We use a disciplined, data-driven process, which includes extensive demographic research, the use of publicly available information from Medicare and other sources and sophisticated modeling of potential operating results for a new hospital. The process includes an analysis of the:


	•	overall market size for cardiovascular care, including the surrounding communities,

	•	projected population growth in the market, particularly for the population group over the age of 55 because they are the primary recipients of cardiovascular care services,

	•	Medicare reimbursement rates, which vary depending upon the wage index for the market,

	•	effect on reimbursement due to payor mix, including managed care penetration of the market,

	•	competitive strengths and weaknesses of each hospital in the market, and

	•	licensing and regulatory requirements, including certificate of need requirements.

We have participated in the development of or have acquired interests in, and provide management services to, fourteen additional facilities where physicians diagnose and treat cardiovascular disease. We manage four additional hospital-based cardiac catheterization laboratories. We also own and operate a fleet of mobile cardiac catheterization laboratories serving hospital networks and maintain a number of mobile and modular cardiac catheterization laboratories in a rental fleet that we lease on a short-term basis. These diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories are equipped to allow the physicians using them to employ a range of diagnostic and treatment options for patients suffering from cardiovascular disease.

We currently own and/or manage the operations of fourteen cardiac diagnostic and therapeutic facilities. Seven of these facilities are located at hospitals operated by other parties and offer invasive diagnostic and sometimes therapeutic procedures. The remaining seven are not located at hospitals and offer only diagnostic

services. We have ownership interests in six of these facilities. The following table provides information about the fourteen facilities.


(1)	We have an ownership interest in each of these facilities.

(2)	Either party may terminate the agreement for this facility upon six months prior written notice not earlier than seven years from the date the first patient procedure was performed in this facility. We have reason to believe that our hospital partner intends to exercise the early termination option during calendar 2003.

(3)	Our management agreement with each of these facilities includes an option for us to extend the initial term at increments ranging from 1 to 10 years, through an aggregate of up to an additional 40 years for some of the facilities.

(4)	The management agreement with each of these facilities includes an early termination provision upon notice.

(5)	The termination date provided for this facility refers to the professional services agreement with the physician.

We also managed the operations of Wake Heart Cardiac Diagnostic Center during our fiscal 2002, but we exercised our option to terminate early this management arrangement and to close the center effective October 2002 because the center’s operations were not meeting our objectives.

Our management services generally include providing all non-physician personnel required to delivering patient care and the administrative, management and support functions required in the operation of the facility. The physicians who supervise or perform diagnostic and therapeutic procedures at these facilities have complete control over the delivery of cardiovascular healthcare services. The management agreements for each of these centers generally have an extended initial term and several renewal options ranging from one to ten years each. The physicians and hospitals with which we have contracts to operate these centers may terminate the agreements under certain circumstances. We may terminate most of these agreements for cause or upon the occurrence of specified material adverse changes in the business of the centers. We intend to develop with physician groups, or acquire contracts to manage, additional diagnostic and therapeutic facilities in the future.

We are the largest provider of mobile catheterization services to hospital networks in the United States. Mobile laboratories serving hospital networks are moved, usually on a daily basis, from one hospital to another in a particular hospital network or geographic area. Each mobile laboratory is fully equipped and operated by our medical technicians and nurses, which provides a hospital or physician group with a turnkey catheterization laboratory. Our mobile laboratories permit a group of hospitals located in geographic proximity to one another, each with limited cardiovascular patient volume, to offer cardiovascular services through shared access to equipment and personnel. This also allows hospitals and physicians to offer cardiovascular care services while

avoiding the substantial capital expenditures and operating expenses needed to purchase and operate the equipment required to perform these services. We currently have contracts with 29 hospitals for our mobile laboratories. These hospitals pay for the use of our mobile laboratories on a fixed-fee-per-procedure basis and reimburse us for most of the costs incurred in performing procedures. In most instances, the hospitals are obligated to pay a minimum monthly amount regardless of the number of procedures performed in the mobile laboratories while they are located at the hospital.

In addition to our mobile catheterization laboratories serving hospital networks, we maintain a rental fleet of mobile and modular cardiac catheterization laboratories. We lease these laboratories on a short-term basis to hospitals while they are either adding capacity to their existing facilities or replacing or upgrading their equipment. We also lease these laboratories to hospitals that experience a higher demand for cardiac catheterization procedures during a particular season of the year and choose not to expand their own facilities to meet peak period demand. Our rental and modular laboratories are manufactured by leading original equipment manufacturers and have advanced technology and enable cardiologists to perform both diagnostic and interventional therapeutic procedures. Each of our rental units is generally in service for at least nine months of the year. These units allow us to be responsive to immediate demand and create flexibility in our operations.

The following is a brief description of the major cardiovascular procedures physicians perform at our hospitals and other facilities.

Cardiac catheterization: percutaneous intravascular insertion of a catheter into any chamber of the heart or great vessels for diagnosis, assessment of abnormalities, interventional treatment, and evaluation of the effects of pathology on the heart and great vessels.


	Atherectomy: A technique using a cutting device to remove plaque from an artery. (Can be used for coronary and non-coronary artery)

	Angioplasty: a method of treating narrowing of a vessel (if coronary usually called PTCA-percutaneous transluminal coronary angioplasty), using a balloon catheter to dilate the narrowed vessel.

	Percutaneous Balloon Angioplasty: the insertion of one or more balloons across a stenotic heart valve.

	Stent: a small expandable wire tube, usually stainless steel, with a self-expanding mesh introduced into an artery. It is used to prevent lumen closure (restenosis) NOTE: stents can be placed in coronary arteries, renal, aortic and other peripheral arteries.

	Brachytherapy: a radiation therapy using implants of radioactive material placed inside a coronary stent with restenosis.

Electrophysiology (EP) study: a diagnostic study of the electrical system of the heart. Procedures include the following:


	Cardiac ablation: Removal of a part, pathway or function by surgery, chemical destruction, electrocautery, or radio frequency.

	Pacemaker implant: An electrical device that can substitute for a defective natural pacemaker and control the beating of the heart by a series of rhythmic electrical discharges.

	Automatic Internal Cardiac Defibrillator (AICD, ICD): Cardioverter implanted in patients at high risk for sudden death from ventricular arrhythmias.

	Cardiac assist devices: (example LVAD Left ventricular assist device) a kind of mechanical heart. It is placed inside of a person’s chest where it helps the heart pump oxygen rich blood through out the body.

Coronary artery bypass graft surgery: A surgical establishment of a shunt that permits blood to travel from the aorta to a branch of the coronary artery at a point past the obstruction.

Valve Replacement Surgery. Valve replacement is an open-heart surgical procedure involving the replacement of valves that regulate the flow of blood between chambers in the heart, which have become narrowed or ineffective due to the build-up of calcium or scar tissue or the presence of some other physical damage.

Cardiac magnetic resonance imaging. This test uses a powerful magnet to produce highly detailed, accurate and reproducible images of the heart and surrounding structures as well as the blood vessels in the body without the need for contrast agents.

Echocardiogram with color flow doppler, or ultrasound test. This test produces real time images of the interior of the heart muscle and valves, which are used to accurately evaluate heart valve and muscle problems and measure heart muscle damage.

Nuclear treadmill exercise test, or nuclear angiogram. This test, which involves the injection of a low level radioactive tracer isotope into the patient’s bloodstream during exercise on a motorized treadmill, frequently is used to screen patients who may need cardiac catheterization and to evaluate the results in patients who have undergone angioplasty or cardiac surgery.

Standard treadmill exercise test. This test, which involves a patient exercising on a motorized treadmill while the electrical activity of the patient’s heart is measured, frequently is used to screen for heart disease.

Ultrafast computerized tomography. This test detects the buildup of calcified plaque in coronary arteries before the patient experiences any symptoms.

We provide business consulting and management services to primarily cardiovascular physician group practices nationwide. We currently consult for and/or manage physician groups with a combined total of over 100 cardiovascular physicians. Services provided include primarily business process reengineering, strategic planning and ancillary development. The physicians in the practices who supervise or provide healthcare services have complete control over the delivery of healthcare services.

We have a compliance program that is consistent with guidelines issued by the Office of Inspector General of the Department of Health and Human Services. As part of this compliance program, we adopted a Code of Ethics and designated compliance officers at the corporate level and at individual


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended September 30, 2002
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		56-2248952
(State or other jurisdiction of incorporation or organization)		(IRS employer identification No.)


		Page

PART I
Item 1:	Business		4
Item 2:	Properties		25
Item 3:	Legal Proceedings		25
Item 4:	Submission of Matters to a Vote of Security Holders		25

PART II
Item 5:	Market for the Registrant’s Common Equity and Related Stockholder Matters		28
Item 6:	Selected Consolidated Financial Data		29
Item 7:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 7A:	Quantitative and Qualitative Disclosures About Market Risk		50
Item 8:	Financial Statements and Supplementary Data		51
Item 9:	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		80

PART III
Item 10:	Directors and Executive Officers of the Registrant		81
Item 11:	Executive Compensation		81
Item 12:	Security Ownership of Certain Beneficial Owners and Management		81
Item 13:	Certain Relationships and Related Transactions		81
Item 14:	Controls and Procedures		81
Item 15:	Exhibits, Financial Statement Schedules and Reports on Form 8-K		82
SIGNATURES			86
CERTIFICATES			87


					Opening Date
		MedCath			(Scheduled	Licensed		Cath		Operating
Hospital	Location	Ownership			Opening Date)	Beds		Labs		Rooms

Arkansas Heart Hospital	Little Rock, AR		70.3	%	Mar. 1997		84		6		3
Tucson Heart Hospital	Tucson, AZ		58.8	%	Oct. 1997		60		4		3
Arizona Heart Hospital	Phoenix, AZ		70.6	%	Jun. 1998		59		4		3
Heart Hospital of Austin	Austin, TX		70.9	%	Jan. 1999		58		4		3
Dayton Heart Hospital	Dayton, OH		66.5	%	Sept. 1999		47		4		3
Bakersfield Heart Hospital	Bakersfield, CA		53.3	%	Oct. 1999		47		4		3
Heart Hospital of New Mexico(1)	Albuquerque, NM		69.0	%	Oct. 1999		55		4		3
Heart Hospital of South Dakota(2)	Sioux Falls, SD		33.3	%	Mar. 2001		55		3		3
Harlingen Medical Center	Harlingen, TX		51.0	%	Oct. 2002		112		2		7
Louisiana Heart Hospital	St. Tammany Parish, LA		52.6	%	(Mar. 2003)		58		3		4
Heart Hospital of San Antonio(3)	San Antonio, TX		51.4	%	(Late summer 2003)		60		4		4
The Heart Hospital of Milwaukee(3)	Glendale, WI		60.3	%	(Fall 2003)		32		3		3
Heart Hospital of Lafayette(3)	Lafayette, LA		59.1	%	(Fall 2003)		32		2		2


	•	Partnering with Cardiologists and Cardiovascular Surgeons


	Mobile Catheterization Laboratories Serving Hospital Networks


	•	Cardiovascular Disease Focus


	•	Patient-Focused Care


	•	Developing New Hospitals


	•	Measuring the Quality of Care