UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2002
Commission File Number 000-33009
MEDCATH CORPORATION
| Delaware | 56-2248952 | |
| (State or other jurisdiction of | (IRS Employer Identification No.) | |
| incorporation or organization) |
10720 Sikes Place
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(704) 708-6600
(Registrant’s telephone number, including area code)
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.
[ X ] Yes [ ] No
As of January 31, 2003, there were 18,011,520 shares of $0.01 par value common stock outstanding.
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
| Page | ||||||||||||
| PART I. FINANCIAL INFORMATION | ||||||||||||
| Item 1. |
Financial Statements |
|||||||||||
| |
Consolidated Balance Sheets as of December 31, 2002
and September 30, 2002 |
3 | ||||||||||
Consolidated Statements of Operations for the Three Months
Ended December 31, 2002 and 2001 |
4 | |||||||||||
Consolidated Statement of Stockholders’ Equity for the
Three Months ended December 31, 2002 |
5 | |||||||||||
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2002 and 2001 |
6 | |||||||||||
Notes to Consolidated Financial Statements |
7 | |||||||||||
| Item 2. |
Management’s Discussion
and Analysis of Financial Condition and Results of Operations |
15 | ||||||||||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
24 | ||||||||||
| Item 4. |
Controls and Procedures |
24 | ||||||||||
| PART II. OTHER INFORMATION | ||||||||||||
| Item 2. |
Changes in Securities and Use of Proceeds |
25 | ||||||||||
| Item 6. |
Exhibits and Reports on Form 8-K |
25 | ||||||||||
| SIGNATURES | 26 | |||||||||||
| CERTIFICATES | 27 | |||||||||||
2
PART I. FINANCIAL INFORMATION
MEDCATH CORPORATION
| December 31, | September 30, | ||||||||||
| 2002 | 2002 | ||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 110,102 | $ | 118,768 | |||||||
Accounts receivable, net |
72,554 | 70,890 | |||||||||
Medical supplies |
13,942 | 13,566 | |||||||||
Due from affiliates |
14 | 20 | |||||||||
Deferred income tax assets |
2,256 | 1,977 | |||||||||
Prepaid expenses and other current assets |
9,770 | 8,112 | |||||||||
Total current assets |
208,638 | 213,333 | |||||||||
Property and equipment, net |
384,156 | 368,424 | |||||||||
Investments in and advances to affiliates, net |
2,791 | 3,234 | |||||||||
Goodwill, net |
132,747 | 132,168 | |||||||||
Other intangible assets, net |
18,733 | 19,280 | |||||||||
Other assets |
4,672 | 4,602 | |||||||||
Total assets |
$ | 751,737 | $ | 741,041 | |||||||
Current liabilities: |
|||||||||||
Short-term borrowings |
$ | 2,500 | $ | 4,500 | |||||||
Accounts payable |
27,623 | 31,708 | |||||||||
Income tax payable |
629 | 609 | |||||||||
Accrued compensation and benefits |
14,076 | 15,806 | |||||||||
Accrued property taxes |
3,399 | 3,090 | |||||||||
Accrued construction and development costs |
22,140 | 24,317 | |||||||||
Other accrued liabilities |
7,032 | 7,241 | |||||||||
Current portion of long-term debt and obligations
under capital leases |
32,268 | 28,237 | |||||||||
Total current liabilities |
109,667 | 115,508 | |||||||||
Long-term debt |
278,657 | 261,009 | |||||||||
Obligations under capital leases |
10,310 | 10,447 | |||||||||
Deferred income tax liabilities |
3,262 | 2,194 | |||||||||
Other long-term obligations |
5,938 | 5,818 | |||||||||
Total liabilities |
407,834 | 394,976 | |||||||||
Minority interest in equity of consolidated subsidiaries |
17,867 | 20,375 | |||||||||
Stockholders’ equity: |
|||||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized; |
|||||||||||
none issued |
— | — | |||||||||
Common stock, $0.01 par value, 50,000,000 shares authorized; |
|||||||||||
18,011,520 shares issued and outstanding
at December 31, 2002 and September 30, 2002 |
180 | 180 | |||||||||
Paid-in capital |
357,707 | 357,707 | |||||||||
Accumulated deficit |
(30,396 | ) | (30,786 | ) | |||||||
Accumulated other comprehensive loss |
(1,455 | ) | (1,411 | ) | |||||||
Total stockholders’ equity |
326,036 | 325,690 | |||||||||
Total liabilities, minority interest, and stockholders’ equity |
$ | 751,737 | $ | 741,041 | |||||||
See notes to consolidated financial statements.
3
MEDCATH CORPORATION
| Three Months Ended December 31, | ||||||||||
| 2002 | 2001 | |||||||||
Net revenue |
$ | 121,101 | $ | 114,950 | ||||||
Operating expenses: |
||||||||||
Personnel expense |
39,750 | 34,034 | ||||||||
Medical supplies expense |
27,948 | 26,728 | ||||||||
Bad debt expense |
5,234 | 5,960 | ||||||||
Other operating expenses |
29,222 | 26,623 | ||||||||
Pre-opening expenses |
2,406 | 949 | ||||||||
Depreciation |
9,517 | 8,826 | ||||||||
Amortization |
437 | 950 | ||||||||
Loss (gain) on disposal of property, equipment and other assets |
70 | (1,002 | ) | |||||||
Total operating expenses |
114,584 | 103,068 | ||||||||
Income from operations |
6,517 | 11,882 | ||||||||
Other income (expenses): |
||||||||||
Interest expense |
(6,206 | ) | (6,314 | ) | ||||||
Interest income |
452 | 732 | ||||||||
Other income, net |
23 | 23 | ||||||||
Equity in net earnings of unconsolidated affiliates |
754 | 814 | ||||||||
Total other expenses, net |
(4,977 | ) | (4,745 | ) | ||||||
Income before minority interest and income taxes |
1,540 | 7,137 | ||||||||
Minority interest share of earnings of consolidated
subsidiaries |
(891 | ) | (1,787 | ) | ||||||
Income before income taxes |
649 | 5,350 | ||||||||
Income tax expense |
(259 | ) | (55 | ) | ||||||
Net income |
$ | 390 | $ | 5,295 | ||||||
Earnings per share, basic and diluted |
$ | 0.02 | $ | 0.29 | ||||||
Weighted average number of shares, basic |
18,012 | 18,012 | ||||||||
Dilutive effect of stock options |
72 | 107 | ||||||||
Weighted average number of shares, diluted |
18,084 | 18,119 | ||||||||
See notes to consolidated financial statements.
4
MEDCATH CORPORATION
| Accumulated | ||||||||||||||||||||||||||
| Common Stock | Other | |||||||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | ||||||||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Loss | Total | |||||||||||||||||||||
Balance, September 30, 2002 |
18,012 | $ | 180 | $ | 357,707 | $ | (30,786 | ) | $ | (1,411 | ) | $ | 325,690 | |||||||||||||
Comprehensive income |
||||||||||||||||||||||||||
Net income |
— | — | 390 | — | 390 | |||||||||||||||||||||
Change in fair value of interest rate
swaps, net of income tax benefit |
— | — | — | (44 | ) | (44 | ) | |||||||||||||||||||
Total comprehensive income |
346 | |||||||||||||||||||||||||
Balance, December 31, 2002 |
18,012 | $ | 180 | $ | 357,707 | $ | (30,396 | ) | $ | (1,455 | ) | $ | 326,036 | |||||||||||||
See notes to consolidated financial statements.
5
MEDCATH CORPORATION
| Three Months Ended December 31, | |||||||||||
| 2002 | 2001 | ||||||||||
Net income |
$ | 390 | $ | 5,295 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Bad debt expense |
5,234 | 5,960 | |||||||||
Depreciation and amortization |
9,954 | 9,776 | |||||||||
Loss (gain) on disposal of property and equipment |
70 | (1,002 | ) | ||||||||
Amortization of loan acquisition costs |
373 | 255 | |||||||||
Equity in net earnings of unconsolidated affiliates |
(754 | ) | (814 | ) | |||||||
Minority interest share of earnings of consolidated subsidiaries |
891 | 1,787 | |||||||||
Deferred income taxes |
239 | — | |||||||||
Change in assets and liabilities that relate to operations: |
|||||||||||
Accounts receivable |
(6,898 | ) | (9,863 | ) | |||||||
Medical supplies |
(376 | ) | (1,422 | ) | |||||||
Due from affiliates |
6 | (26 | ) | ||||||||
Prepaid expenses and other current assets |
(2,004 | ) | (798 | ) | |||||||
Other assets |
(307 | ) | (13 | ) | |||||||
Accounts payable and accrued liabilities |
(5,695 | ) | (2,003 | ) | |||||||
Net cash provided by operating activities |
1,123 | 7,132 | |||||||||
Investing activities: |
|||||||||||
Purchases of property and equipment |
(26,432 | ) | (15,130 | ) | |||||||
Proceeds from sale of property and equipment |
225 | 54 | |||||||||
Loans under management agreements |
— | (24 | ) | ||||||||
Repayments of loans under management agreements |
40 | 301 | |||||||||
Investments in and advances to affiliates, net |
1,044 | 2,156 | |||||||||
Cash acquired upon consolidation of equity method investee |
— | 151 | |||||||||
Acquisition of increased ownership in hospital |
— | (17,377 | ) | ||||||||
Other investing activities |
136 | 33 | |||||||||
Net cash used in investing activities |
(24,987 | ) | (29,836 | ) | |||||||
Financing activities: |
|||||||||||
Net short-term borrowings |
(2,000 | ) | — | ||||||||
Proceeds from issuance of long-term debt |
27,903 | 15,948 | |||||||||
Repayments of long-term debt |
(6,335 | ) | (6,882 | ) | |||||||
Repayments of obligations under capital leases |
(649 | ) | (510 | ) | |||||||
Payment of loan acquisition costs |
(336 | ) | (197 | ) | |||||||
Investments by minority partners |
370 | 3,988 | |||||||||
Distributions to minority partners |
(3,755 | ) | (1,719 | ) | |||||||
Net cash provided by financing activities |
15,198 | 10,628 | |||||||||
Net decrease in cash and cash equivalents |
(8,666 | ) | (12,076 | ) | |||||||
Cash and cash equivalents: |
|||||||||||
Beginning of period |
118,768 | 114,357 | |||||||||
End of period |
$ | 110,102 | $ | 102,281 | |||||||
Supplemental schedule of noncash investing and financing activities: |
|||||||||||
Capital expenditures financed by capital leases |
$ | 678 | $ | 604 | |||||||
Capital expenditures included in accrued construction and
development costs |
4,358 | 2,625 | |||||||||
Notes received for minority interest in development hospitals |
364 | 2,868 | |||||||||
Note received in settlement of management contract |
— | 1,686 | |||||||||
See notes to consolidated financial statements.
6
MEDCATH CORPORATION
1. Business and Organization
MedCath Corporation (the Company) primarily focuses on the diagnosis and treatment of cardiovascular disease. The Company designs, develops, owns and operates hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular surgeons. While each of the Company’s hospitals (collectively, the Hospital Division) is licensed as a general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of December 31, 2002, the Company owned and operated nine hospitals, together with its physician partners, who own an equity interest in the hospital where they practice. The Company’s existing hospitals have a total of 577 licensed beds and are located in Arizona, Arkansas, California, New Mexico, Ohio, South Dakota and Texas. In addition to its hospitals, the Company provides cardiovascular care services in diagnostic and therapeutic facilities located in eight states and through mobile cardiac catheterization laboratories (the Diagnostics Division). The Company also provides consulting and management services (CCM) tailored primarily to cardiologists and cardiovascular surgeons, which is included in the corporate and other division.
2. Summary of Significant Accounting Policies
Basis of Presentation - The Company’s unaudited interim consolidated financial statements as of December 31, 2002 and for the three months ended December 31, 2002 and 2001, have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments (consisting only of normal recurring adjustments) necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated. The results of operations for the three months December 31, 2002 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2003 or future fiscal years.
Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2002 included in the Company’s Annual Report on Form 10-K.
Reclassifications – Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. There is a reasonable possibility that actual results may vary significantly from those estimates.
Pre-opening Expenses – Pre-opening expenses consist of operating expenses incurred during the development of a new venture and prior to its opening for business. Such costs specifically relate to ventures under development and are expensed as incurred. The Company recognized pre-opening expenses of approximately $2.4 million and $949,000 during the three months ended December 31, 2002 and 2001, respectively.
Stock-Based Compensation –At December 31, 2002, the Company has two stock-based compensation plans, including a stock option plan under which it may grant incentive stock options and nonqualified stock options to officers and other key employees and an outside director’s stock option plan under which it may grant nonqualified stock options to nonemployee directors. The company accounts for stock options under both of these plans in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB Opinion No, 25, compensation cost is determined based on the intrinsic value of the equity instrument award. No stock-based employee compensation cost is reflected in net income for the three
7
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
months ended December 31, 2002 and 2001, as all options granted during those periods under the Company’s stock option plans had an exercise price equal to the market value of the underlying common stock at the date of grant. If the Company had applied the fair value recognition provisions of SFAS No. 123 to account for its stock option plans, then the Company’s net income and earnings per share for the three months ended December 31, 2002 and 2001 would have been as follows:
| Three Months Ended | |||||||||
| December 31, | |||||||||
| 2002 | 2001 | ||||||||
Net income, as reported |
$ | 390 | $ | 5,295 | |||||
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
521 | 572 | |||||||
Pro forma net income (loss) |
$ | (131 | ) | $ | 4,723 | ||||