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, 2003
Commission File Number 000-33009
| Delaware | 56-2248952 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
10720 Sikes Place, Suite 300
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.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of January 31, 2004, there were 17,985,644 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, 2003
and September 30, 2003 |
3 | |||||
Consolidated Statements of Operations for the Three Months Ended
December 31, 2003 and 2002 |
4 | |||||
Consolidated Statement of Stockholders’ Equity for the
Three Months Ended December 31, 2003 |
5 | |||||
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 2003 and 2002 |
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 |
27 | |||||
Item 4. Controls and Procedures |
28 | |||||
PART
II. OTHER INFORMATION |
||||||
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities |
29 | |||||
Item 6. Exhibits and Reports on Form 8-K |
29 | |||||
SIGNATURES |
30 | |||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | September 30, | |||||||||
| 2003 | 2003 | |||||||||
| (Unaudited) | ||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 80,468 | $ | 94,199 | ||||||
Accounts receivable, net |
91,180 | 86,306 | ||||||||
Medical supplies |
17,767 | 16,424 | ||||||||
Due from affiliates |
150 | 187 | ||||||||
Deferred income tax assets |
3,225 | 3,145 | ||||||||
Prepaid expenses and other current assets |
7,339 | 7,668 | ||||||||
Total current assets |
200,129 | 207,929 | ||||||||
Property and equipment, net |
448,292 | 436,947 | ||||||||
Investments in and advances to affiliates, net |
3,269 | 5,486 | ||||||||
Goodwill, net |
75,000 | 75,000 | ||||||||
Other intangible assets, net |
16,512 | 17,095 | ||||||||
Other assets |
4,314 | 6,840 | ||||||||
Total assets |
$ | 747,516 | $ | 749,297 | ||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 46,100 | $ | 42,360 | ||||||
Income tax payable |
164 | 278 | ||||||||
Accrued compensation and benefits |
19,560 | 20,356 | ||||||||
Accrued property taxes |
3,595 | 4,723 | ||||||||
Accrued construction and development costs |
6,241 | 15,340 | ||||||||
Other accrued liabilities |
11,078 | 11,667 | ||||||||
Current portion of long-term debt and obligations
under capital leases |
52,885 | 49,287 | ||||||||
Total current liabilities |
139,623 | 144,011 | ||||||||
Long-term debt |
307,179 | 300,884 | ||||||||
Obligations under capital leases |
10,318 | 10,814 | ||||||||
Deferred income tax liabilities |
3,489 | 3,951 | ||||||||
Other long-term obligations |
7,268 | 7,164 | ||||||||
Total liabilities |
467,877 | 466,824 | ||||||||
Minority interest in equity of consolidated subsidiaries |
15,014 | 17,419 | ||||||||
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 issued and 17,980,332 outstanding at December 31, 2003;
18,011,520 issued and 17,942,620 outstanding at September 30, 2003 |
180 | 180 | ||||||||
Paid-in capital |
357,965 | 357,707 | ||||||||
Accumulated deficit |
(92,025 | ) | (91,092 | ) | ||||||
Accumulated other comprehensive loss |
(1,101 | ) | (1,347 | ) | ||||||
Treasury stock, at cost, 68,900 shares held at December 31, 2003
and September 30, 2003 |
(394 | ) | (394 | ) | ||||||
Total stockholders’ equity |
264,625 | 265,054 | ||||||||
Total liabilities, minority interest and stockholders’ equity |
$ | 747,516 | $ | 749,297 | ||||||
See notes to consolidated financial statements.
3
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended December 31, | ||||||||||
| 2003 | 2002 | |||||||||
Net revenue |
$ | 156,626 | $ | 121,101 | ||||||
Operating expenses: |
||||||||||
Personnel expense |
48,853 | 39,750 | ||||||||
Medical supplies expense |
42,617 | 27,948 | ||||||||
Bad debt expense |
13,859 | 5,234 | ||||||||
Other operating expenses |
32,955 | 29,222 | ||||||||
Pre-opening expenses |
3,444 | 2,406 | ||||||||
Depreciation |
10,443 | 9,517 | ||||||||
Amortization |
290 | 437 | ||||||||
Loss (gain) on disposal of property, equipment
and other assets |
(84 | ) | 70 | |||||||
Total operating expenses |
152,377 | 114,584 | ||||||||
Income from operations |
4,249 | 6,517 | ||||||||
Other income (expenses): |
||||||||||
Interest expense |
(6,589 | ) | (6,206 | ) | ||||||
Interest income |
233 | 452 | ||||||||
Other income, net |
4 | 23 | ||||||||
Equity in net earnings of unconsolidated affiliates |
577 | 754 | ||||||||
Total other expenses, net |
(5,775 | ) | (4,977 | ) | ||||||
Income (loss) before minority interest and income taxes |
(1,526 | ) | 1,540 | |||||||
Minority interest share of earnings of consolidated
subsidiaries |
(34 | ) | (891 | ) | ||||||
Income (loss) income before income taxes |
(1,560 | ) | 649 | |||||||
Income tax benefit (expense) |
627 | (259 | ) | |||||||
Net income (loss) |
$ | (933 | ) | $ | 390 | |||||
Earnings (loss) per share, basic and diluted |
$ | (0.05 | ) | $ | 0.02 | |||||
Weighted average number of shares, basic |
17,949 | 18,012 | ||||||||
Dilutive effect of stock options |
— | 72 | ||||||||
Weighted average number of shares, diluted |
17,949 | 18,084 | ||||||||
See notes to consolidated financial statements.
4
MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| Accumulated | |||||||||||||||||||||||||||||||||||
| Common Stock | Other | Treasury Stock | |||||||||||||||||||||||||||||||||
| Paid-in | Accumulated | Comprehensive | |||||||||||||||||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Loss | Shares | Amount | Total | ||||||||||||||||||||||||||||
Balance, September 30, 2003 |
17,943 | $ | 180 | $ | 357,707 | $ | (91,092 | ) | $ | (1,347 | ) | 69 | $ | (394 | ) | 265,054 | |||||||||||||||||||
Exercise of stock options |
38 | — | 258 | — | — | — | — | 258 | |||||||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||||||||||||
Net loss |
— | — | — | (933 | ) | — | — | — | (933 | ) | |||||||||||||||||||||||||
Change in fair value of
interest rate swaps,
net of income tax expense |
— | — | — | — | 246 | — | — | 246 | |||||||||||||||||||||||||||
Total comprehensive loss |
(687 | ) | |||||||||||||||||||||||||||||||||
Balance, December 31, 2003 |
17,981 | $ | 180 | $ | 357,965 | $ | (92,025 | ) | $ | (1,101 | ) | 69 | $ | (394 | ) | $ | 264,625 | ||||||||||||||||||
See notes to consolidated financial statements.
5
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended December 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Net income (loss) |
$ | (933 | ) | $ | 390 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Bad debt expense |
13,859 | 5,234 | |||||||||
Depreciation and amortization |
10,733 | 9,954 | |||||||||
Loss (gain) on disposal of property, equipment and other assets |
(84 | ) | 70 | ||||||||
Amortization of loan acquisition costs |
436 | 373 | |||||||||
Equity in net earnings of unconsolidated affiliates |
(577 | ) | (754 | ) | |||||||
Minority interest share of earnings of consolidated subsidiaries |
34 | 891 | |||||||||
Deferred income taxes |
(627 | ) | 239 | ||||||||
Change in assets and liabilities that relate to operations: |
|||||||||||
Accounts receivable, net |
(17,635 | ) | (6,898 | ) | |||||||
Medical supplies |
(1,343 | ) | (376 | ) | |||||||
Due from affiliates |
37 | 6 | |||||||||
Prepaid expenses and other current assets |
329 | (2,004 | ) | ||||||||
Other assets |
2,461 | (307 | ) | ||||||||
Accounts payable and accrued liabilities |
307 | (5,695 | ) | ||||||||
Net cash provided by operating activities |
6,997 | 1,123 | |||||||||
Investing activities: |
|||||||||||
Purchases of property and equipment |
(30,696 | ) | (26,432 | ) | |||||||
Proceeds from sale of property and equipment |
1,214 | 225 | |||||||||
Repayments of loans under management agreements |
43 | 40 | |||||||||
Investments in and advances to affiliates, net |
— | 1,044 | |||||||||
Dividends received from unconsolidated affiliates |
2,849 | — | |||||||||
Other investing activities |
— | 136 | |||||||||
Net cash used in investing activities |
(26,590 | ) | (24,987 | ) | |||||||
Financing activities: |
|||||||||||
Short-term debt repayments, net |
— | (2,000 | ) | ||||||||
Proceeds from issuance of long-term debt |
36,804 | 27,903 | |||||||||
Repayments of long-term debt |
(26,326 | ) | (6,335 | ) | |||||||
Repayments of obligations under capital leases |
(1,054 | ) | (649 | ) | |||||||
Payment of loan acquisition costs |
(223 | ) | (336 | ) | |||||||
Investments by minority partners |
61 | 370 | |||||||||
Distributions to minority partners |
(3,579 | ) | (3,755 | ) | |||||||
Proceeds from exercised stock options |
179 | — | |||||||||
Net cash provided by financing activities |
5,862 | 15,198 | |||||||||
Net decrease in cash and cash equivalents |
(13,731 | ) | (8,666 | ) | |||||||
Cash and cash equivalents: |
|||||||||||
Beginning of year |
94,199 | 118,768 | |||||||||
End of year |
$ | 80,468 | $ | 110,102 | |||||||
Supplemental schedule of noncash investing and financing activities: |
|||||||||||
Capital expenditures financed by capital leases |
$ | 532 | $ | 678 | |||||||
Capital expenditures included in accrued construction and
development costs |
— | 4,358 | |||||||||
Capital expenditures included in other accrued liabilities |
1,786 | — | |||||||||
Deferred tax asset related to exercised stock options |
79 | — | |||||||||
Notes received for sale of land |
1,098 | — | |||||||||
Notes received from minority interest in development hospitals |
400 | 364 | |||||||||
See notes to consolidated financial statements.
6
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share amounts)
1. Business and Organization
MedCath Corporation (the Company) is a healthcare provider primarily focused on the diagnosis and treatment of cardiovascular disease. The Company designs, develops, owns and operates hospitals in partnership with physicians, whom it believes have established reputations for clinical excellence. Each of the Company’s majority-owned hospitals (collectively, the Hospital Division) is a freestanding licensed general acute care hospital, that provides a wide range of health services, and the medical staff at each hospital includes qualified physicians in various specialities. As of December 31, 2003, the Company owned and operated eleven hospitals, which include ten majority-owned hospitals and one in which the Company owns a minority interest. These hospitals have a total of 667 licensed beds, of which 587 were staffed and available, and are located in nine states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, Texas and Wisconsin.
On January 13, 2004, the Company opened its twelfth hospital, which is located in San Antonio, Texas. This hospital is designed to accommodate 120 inpatient beds and will initially open with 60 licensed beds that will be staffed and available as the hospital ramps up its operations. The Company is currently completing the development of its thirteenth hospital, which is located in Lafayette, Louisiana and will open with 32 licensed beds in March 2004.
The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a minority interest in Heart Hospital of South Dakota and does not have substantive control over the hospital, and therefore is unable to consolidate the hospital’s results of operations and financial position, but rather is required to account for its minority ownership interest in the hospital as an equity investment. The Company is currently evaluating the accounting for its interest in this hospital under Financial Accounting Standards Board (FASB) Interpretation No. 46-R that was issued in December 2003 regarding consolidation of variable interest entities. See “Accounting Changes and Recent Accounting Pronouncements” in Note 2 below.
In addition to its hospitals, the Company provides cardiovascular care services in diagnostic and therapeutic facilities located in various locations 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, 2003 and for the three months ended December 31, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States of America (hereafter, generally accepted accounting principles) 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 ended December 31, 2003 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2004 or future fiscal periods.
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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.
Use of Estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect 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
7
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
expensed as incurred. The Company recognized pre-opening expenses of approximately $3.4 million and $2.4 million during the three months ended December 31, 2003 and 2002, respectively.
Stock-Based Compensation – As of December 31, 2003, 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 under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. The Company also provides prominent disclosure of the information required by SFAS No. 148, Accounting for Stock-Based Compensation, in its annual and interim financial statements.
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 months ended December 31, 2003 and 2002, 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 shares of common stock at the date of grant.
Had compensation expense for the Company’s stock options been recognized based on the fair value of the option award at the grant date under the methodology prescribed by SFAS No. 123, the Company’s net income (loss) for the three months ended December 31, 2003 and 2002 would have been impacted as follows:
| Three Months Ended December 31, | |||||||||
| 2003 | 2002 | ||||||||
Net income (loss), as reported |
|||||||||