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, 2004
Commission File Number 000-33009
MEDCATH CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 56-2248952 | |
| (State or other jurisdiction of | (IRS Employer Identification No.) | |
| incorporation or organization) |
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ No o
As of January 31, 2005, there were 18,172,461 shares of $0.01 par value common stock outstanding.
1
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
MEDCATH CORPORATION
| December 31, | September 30, | |||||||
| 2004 | 2004 | |||||||
| (Unaudited) | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 116,365 | $ | 72,310 | ||||
Accounts receivable, net |
96,194 | 92,797 | ||||||
Medical supplies |
23,719 | 22,205 | ||||||
Due from affiliates |
209 | 136 | ||||||
Deferred income tax assets |
12,212 | 11,972 | ||||||
Prepaid expenses and other current assets |
8,341 | 7,802 | ||||||
Current assets of discontinued operations |
1,941 | 6,602 | ||||||
Total current assets |
258,981 | 213,824 | ||||||
Property and equipment, net |
405,909 | 410,908 | ||||||
Investments in and advances to affiliates, net |
4,047 | 6,029 | ||||||
Goodwill |
70,100 | 70,100 | ||||||
Other intangible assets, net |
10,456 | 10,746 | ||||||
Other assets |
13,153 | 13,473 | ||||||
Long-term assets of discontinued operations |
402 | 33,355 | ||||||
Total assets |
$ | 763,048 | $ | 758,435 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 48,465 | $ | 46,372 | ||||
Income tax payable |
413 | 533 | ||||||
Accrued compensation and benefits |
20,580 | 25,914 | ||||||
Accrued property taxes |
5,526 | 6,565 | ||||||
Other accrued liabilities |
20,261 | 15,968 | ||||||
Current portion of long-term debt and obligations
under capital leases |
10,427 | 9,872 | ||||||
Current liabilities of discontinued operations |
2,629 | 1,720 | ||||||
Total current liabilities |
108,301 | 106,944 | ||||||
Long-term debt |
343,885 | 346,006 | ||||||
Obligations under capital leases |
5,087 | 5,641 | ||||||
Deferred income tax liabilities |
11,361 | 13,693 | ||||||
Other long-term obligations |
7,344 | 7,330 | ||||||
Total liabilities |
475,978 | 479,614 | ||||||
Minority interest in equity of consolidated subsidiaries |
17,571 | 15,173 | ||||||
Commitments and contingencies |
||||||||
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;
18,158,337 issued and 18,089,437 outstanding at December 31, 2004 and
18,090,186 issued and 18,021,286 outstanding at September 30, 2004 |
182 | 181 | ||||||
Paid-in capital |
359,926 | 358,656 | ||||||
Accumulated deficit |
(90,175 | ) | (94,715 | ) | ||||
Accumulated other comprehensive loss |
(40 | ) | (80 | ) | ||||
Treasury stock, 68,900 shares at cost |
(394 | ) | (394 | ) | ||||
Total stockholders’ equity |
269,499 | 263,648 | ||||||
Total liabilities and stockholders’ equity |
$ | 763,048 | $ | 758,435 | ||||
See notes to consolidated financial statements.
3
MEDCATH CORPORATION
| Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Net revenue |
$ | 184,760 | $ | 155,123 | ||||
Operating expenses: |
||||||||
Personnel expense |
57,213 | 47,012 | ||||||
Medical supplies expense |
52,486 | 41,977 | ||||||
Bad debt expense |
11,484 | 13,788 | ||||||
Other operating expenses |
38,400 | 31,520 | ||||||
Pre-opening expenses |
— | 3,016 | ||||||
Depreciation |
9,736 | 9,723 | ||||||
Amortization |
290 | 290 | ||||||
(Gain)/loss on disposal of property, equipment and other assets |
3 | (84 | ) | |||||
Total operating expenses |
169,612 | 147,242 | ||||||
Income from operations |
15,148 | 7,881 | ||||||
Other income (expenses): |
||||||||
Interest expense |
(7,998 | ) | (6,320 | ) | ||||
Interest income |
390 | 231 | ||||||
Other income, net |
5 | 4 | ||||||
Equity in net earnings of unconsolidated affiliates |
769 | 577 | ||||||
Total other expenses, net |
(6,834 | ) | (5,508 | ) | ||||
Income from continuing operations before minority interest,
income taxes and discontinued operations |
8,314 | 2,373 | ||||||
Minority interest share of earnings of consolidated
subsidiaries |
(3,999 | ) | (1,091 | ) | ||||
Income from continuing operations before income taxes and
discontinued operations |
4,315 | 1,282 | ||||||
Income tax expense |
1,723 | 517 | ||||||
Income from continuing operations |
2,592 | 765 | ||||||
Income (loss) from discontinued operations, net of taxes |
1,948 | (1,698 | ) | |||||
Net income (loss) |
$ | 4,540 | $ | (933 | ) | |||
Earnings (loss) per share, basic |
||||||||
Continuing operations |
$ | 0.14 | $ | 0.04 | ||||
Discontinued operations |
0.11 | (0.09 | ) | |||||
Earnings (loss) per share, basic |
$ | 0.25 | $ | (0.05 | ) | |||
Earnings (loss) per share, diluted |
||||||||
Continuing operations |
$ | 0.14 | $ | 0.04 | ||||
Discontinued operations |
0.10 | (0.09 | ) | |||||
Earnings (loss) per share, diluted |
$ | 0.24 | $ | (0.05 | ) | |||
Weighted average number of shares, basic |
18,045 | 17,949 | ||||||
Dilutive effect of stock options |
932 | — | ||||||
Weighted average number of shares, diluted |
18,977 | 17,949 | ||||||
See notes to consolidated financial statements.
4
MEDCATH CORPORATION
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
| Shares | Par Value | Capital | Deficit | Loss | Shares | Amount | Total | |||||||||||||||||||||||||
Balance, September 30, 2004 |
18,022 | $ | 181 | $ | 358,656 | $ | (94,715 | ) | $ | (80 | ) | 69 | $ | (394 | ) | $ | 263,648 | |||||||||||||||
Exercise of stock options |
68 | 1 | 1,270 | — | — | — | — | 1,271 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
— | — | — | 4,540 | — | — | — | 4,540 | ||||||||||||||||||||||||
Change in fair value of
interest rate swaps,
net of income tax expense |
— | — | — | — | 40 | — | — | 40 | ||||||||||||||||||||||||
Total comprehensive income |
4,580 | |||||||||||||||||||||||||||||||
Balance, December 31, 2004 |
18,090 | $ | 182 | $ | 359,926 | $ | (90,175 | ) | $ | (40 | ) | 69 | $ | (394 | ) | $ | 269,499 | |||||||||||||||
See notes to consolidated financial statements.
5
MEDCATH CORPORATION
| Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Net income (loss) |
$ | 4,540 | $ | (933 | ) | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Bad debt expense |
11,484 | 13,788 | ||||||
Depreciation and amortization expense |
10,026 | 10,013 | ||||||
(Gain)/loss on disposal of property, equipment and other assets |
3 | (84 | ) | |||||
Amortization of loan acquisition costs |
401 | 389 | ||||||
Undistributed earnings of unconsolidated affiliates |
1,898 | 2,272 | ||||||
Minority interest share of earnings of consolidated subsidiaries |
3,999 | 1,091 | ||||||
Deferred income taxes |
1,723 | (517 | ) | |||||
Change in assets and liabilities that relate to operations: |
||||||||
Accounts receivable |
(14,881 | ) | (16,159 | ) | ||||
Medical supplies |
(1,514 | ) | (1,133 | ) | ||||
Prepaids and other assets |
(645 | ) | 414 | |||||
Accounts payable and accrued liabilities |
423 | 3,683 | ||||||
Net cash
provided by continuing operations |
17,457 | 12,824 | ||||||
Net cash used in discontinued operations |
(7,700 | ) | (6,538 | ) | ||||
Net cash provided by operating activities |
9,757 | 6,286 | ||||||
Investing activities: |
||||||||
Purchases of property and equipment |
(5,251 | ) | (19,444 | ) | ||||
Proceeds from sale of property and equipment |
50 | 1,214 | ||||||
Proceeds
from sale of discontinued operations |
42,500 | — | ||||||
Other investing activities |
151 | 43 | ||||||
Net cash
provided by (used in) continuing operations |
37,450 | (18,187 | ) | |||||
Net cash used in discontinued operations |
— | (8,808 | ) | |||||
Net cash provided by (used in) investing activities |
37,450 | (26,995 | ) | |||||
Financing activities: |
||||||||
Proceeds from issuance of long-term debt |
— | 25,539 | ||||||
Repayments of long-term debt |
(1,506 | ) | (26,326 | ) | ||||
Repayments of obligations under capital leases |
(711 | ) | (1,054 | ) | ||||
Payments of loan acquisition costs |
— | (223 | ) | |||||
Investments by minority partners |
3,509 | — | ||||||
Distributions to minority partners |
(5,677 | ) | (3,579 | ) | ||||
Repayments from minority partners |
89 | 61 | ||||||
Proceeds from exercised stock options |
1,144 | 179 | ||||||
Net cash
used in continuing operations |
(3,152 | ) | (5,403 | ) | ||||
Net cash provided by discontinued operations |
— | 11,265 | ||||||
Net cash provided by (used in) financing activities |
(3,152 | ) | 5,862 | |||||
Net increase (decrease) in cash and cash equivalents |
44,055 | (14,847 | ) | |||||
Cash and cash equivalents: |
||||||||
Beginning of period |
72,310 | 93,231 | ||||||
End of period |
$ | 116,365 | $ | 78,384 | ||||
Supplemental schedule of noncash investing and financing activities: |
||||||||
Capital expenditures financed by capital leases |
$ | 212 | $ | 532 | ||||
Capital expenditures included in accrued construction & development |
126 | 79 | ||||||
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 | ||||||
See notes to consolidated financial statements
6
MEDCATH CORPORATION
1. Business and Organization
MedCath Corporation (the Company) is a healthcare provider focused primarily on the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians whom it believes have established reputations for clinical excellence as well as with community hospital systems. 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 specialties. The Company opened its first hospital in 1996, and as of December 31, 2004 has ownership interests in and operates 12 hospitals. These hospitals include 11 majority-owned hospitals and one in which the Company owns a minority interest. The Company’s 12 hospitals have a total of 727 licensed beds, of which 686 were staffed and available at December 31, 2004, and are located in eight states: Arizona, Arkansas, California, Louisiana, New Mexico, Ohio, South Dakota, and Texas.
In addition to its hospitals, the Company owns and/or manages cardiac diagnostic and therapeutic facilities (the Diagnostics Division). The Company began its cardiac diagnostic and therapeutic business in 1989, and as of December 31, 2004 owns and/or manages 26 cardiac diagnostic and therapeutic facilities. Twelve of these facilities are located at hospitals operated by other parties and offer invasive diagnostic and sometimes therapeutic procedures. The remaining 14 facilities are not located at hospitals and offer only diagnostic services. 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, 2004 and for the three months ended December 31, 2004 and 2003 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, 2004 are not necessarily indicative of the results expected for the full fiscal year ending September 30, 2005 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 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, 2004. During the three months ended December 31, 2004, the Company has not made any material changes in the selection or application of its critical accounting policies as set forth its Annual Report on Form 10-K for the year ended September 30, 2004.
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.
Stock-Based Compensation - As of December 31, 2004, the Company has two stock-based compensation plans: 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, 2004 and 2003, 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.
7
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
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 would have been impacted as follows:
| Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Net income (loss), as reported |
$ | 4,540 | $ | (933 | ) | |||
Deduct: Total stock-based employee
compensation expense determined under fair
value method, net of related income taxes |
620 | 454 | ||||||
Proforma net income (loss) |
$ | 3,920 | $ | (1,387 | ) | |||
Earnings (loss) per share, basic |
||||||||
As reported |
$ | 0.25 | $ | (0.05 | ) | |||
Pro forma |
$ | 0.22 | $ | (0.08 | ) | |||
Earnings (loss) per share, diluted |
||||||||
As reported |
$ | 0.24 | $ | (0.05 | ) | |||
Pro forma |
$ | 0.21 | $ | (0.08 | ) | |||
New Accounting Pronouncement - In December 2004, the Financial Accounting Standard Board (the FASB) issued Statement 123R, Share-Based Payment, to be effective for interim or annual periods beginning after June 15, 2005. Accordingly, Statement 123R will become effective in the fourth quarter of fiscal 2005 for the Company. Statement 123R requires all share-based payments to employees, including grants of employee stock options and purchases under employee stock purchase plans, to be recognized as an operating expense in the statement of operations. The cost is recognized over the requisite service period based on fair values measured on grant dates and the new standard may be adopted using either the modified prospective transition method or the modified retrospective transition method. The Company is currently evaluating its share-based employee compensation programs, the potential impact of Statement 123R on its consolidated financial position and results of operations and alternative adoption methods.
3. Discontinued Operations
On November 5, 2004, the Company and local Milwaukee physicians, who jointly owned The Heart Hospital of Milwaukee (HHM), entered into an agreement with Columbia St. Mary’s, a Milwaukee-area hospital group, to close HHM and sell certain assets, primarily comprised of real property and equipment, to Columbia St. Mary’s for $42.5 million. The sale was completed on December 1, 2004 and the Company recognized a gain on the sale of the assets, net of allocated goodwill, of approximately $9.3 million.
In connection with the agreement to sell the assets of HHM, the Company closed the facility prior to the completion of the sale. As a part of the closure, the Company incurred termination benefits and contract termination costs of approximately $2.2 million. In addition, the Company wrote-off approximately $1.4 million related to the net book value of certain assets abandoned as a part of the closure of the facility.
Transaction proceeds were used by HHM to pay intercompany secured debt, which totaled approximately $37.0 million on the date of the closing, as well as transaction costs and hospital operating expenses of approximately $2.0 million. The remaining proceeds from the divestiture, combined with proceeds from the liquidation of the assets not sold to Columbia St. Mary’s, will be used to satisfy certain liabilities of HHM.
8
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
The results of operations of HHM are as follows:
| Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Revenues |
$ | 1,553 | $ | 1,503 | ||||
Restructuring and write-off charges |
(3,635 | ) | — | |||||
Operating
expenses |
(3,278 | ) | (5,134 | ) | ||||
Loss from operations |
(5,360 | ) | (3,631 | ) | ||||
Other income
(expense): |
||||||||
Gain on sale of assets |
9,344 | — | ||||||
Minority interest and other, net |
(474 | ) | 790 | |||||
Income tax
(expense) benefit |
(1,562 | ) | 1,143 | |||||
Net income (loss) |
$ | 1,948 | $ | (1,698 | ) | |||
The principal balance sheet items of HHM, including allocated goodwill and excluding intercompany debt, is as follows:
| December 31, | September 30, | |||||||
| 2004 | 2004 | |||||||
Cash |
$ | 1,903 | $ | 462 | ||||
Accounts receivable, net |
38 | 851 | ||||||
Other current assets |
— | 5,289 | ||||||
Current assets |
$ | 1,941 | $ | 6,602 | ||||
Property and equipment, net |
$ | 402 | $ | 28,455 | ||||
Goodwill |
— | 4,900 | ||||||
Noncurrent assets |
$ | 402 | $ | 33,355 | ||||
Accounts payable |
$ | 396 | $ | 605 | ||||
Accrued liabilities |
671 | 1,115 | ||||||
Income taxes payable |
1,562 | — | ||||||
Total current liabilities |
$ | 2,629 | $ | 1,720 | ||||
4. Accounts Receivable
Accounts receivable, net, consists of the following:
| December 31, | September 30, | |||||||
| 2004 | 2004 | |||||||
Receivables, principally from patients and third-party payors |
$ | 105,531 | $ | 102,485 | ||||
Receivables, principally from billings to hospitals for various
cardiovascular procedures |
4,007 | 3,990 | ||||||
Amounts due under management contracts |
2,868 | 2,698 | ||||||
Other |
3,638 | 2,095 | ||||||
| 116,044 | 111,268 | |||||||
Less allowance for doubtful accounts |
(19,850 | ) | (18,471 | ) | ||||
Accounts receivable, net |
$ | 96,194 | $ | 92,797 | ||||
9
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued
5. Equity Investments
The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns minority interests in Avera Heart Hospital of South Dakota and certain diagnostic ventures and neither has substantive control over the businesses nor is the primary beneficiary under the revised version of FASB Interpretation No. 46 Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. Therefore, the Company is unable to consolidate the results of operations and financial position of these entities, but rather is required to account for its minority ownership interest in the hospital and other ventures as equity investments.
The following represents summarized financial information of Avera Heart Hospital of South Dakota:
| Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
Net revenue |
$ | 15,197 | $ | 13,365 | ||||
Operating income |
$ | 2,804 | $ | 2,285 | ||||
Net income |
$ | 2,223 | $ | 1,612 | ||||