Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - MEDCATH CORP | g27163exv32w1.htm |
EX-31.2 - EX-31.2 - MEDCATH CORP | g27163exv31w2.htm |
EX-31.1 - EX-31.1 - MEDCATH CORP | g27163exv31w1.htm |
EX-32.2 - EX-32.2 - MEDCATH CORP | g27163exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2011
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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)
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(704) 815-7700
(Registrants telephone number, including area code)
(Registrants 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of May 5, 2011, there were 20,327,467 shares of $0.01 par value common stock outstanding.
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 119,735 | $ | 33,141 | ||||
Accounts receivable, net |
49,748 | 43,811 | ||||||
Income tax receivable |
| 6,188 | ||||||
Medical supplies |
10,373 | 10,550 | ||||||
Deferred income tax assets |
8,500 | 13,247 | ||||||
Prepaid expenses and other current assets |
12,949 | 13,453 | ||||||
Current assets of discontinued operations |
46,619 | 47,920 | ||||||
Total current assets |
247,924 | 168,310 | ||||||
Property and equipment, net |
153,469 | 182,222 | ||||||
Other assets |
18,484 | 24,716 | ||||||
Non-current assets of discontinued operations |
1,152 | 119,290 | ||||||
Total assets |
$ | 421,029 | $ | 494,538 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 16,633 | $ | 15,716 | ||||
Income tax payable |
3,205 | | ||||||
Accrued compensation and benefits |
14,775 | 16,418 | ||||||
Other accrued liabilities |
15,503 | 16,663 | ||||||
Current portion of long-term debt and obligations under capital leases |
32,793 | 16,672 | ||||||
Current liabilities of discontinued operations |
14,174 | 35,044 | ||||||
Total current liabilities |
97,083 | 100,513 | ||||||
Long-term debt |
| 52,500 | ||||||
Obligations under capital leases |
5,191 | 6,500 | ||||||
Other long-term obligations |
2,804 | 5,053 | ||||||
Long-term liabilities of discontinued operations |
| 35,968 | ||||||
Total liabilities |
105,078 | 200,534 | ||||||
Commitments and contingencies (See Note 7) |
||||||||
Redeemable noncontrolling interest |
7,356 | 11,534 | ||||||
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; 22,281,828 issued
and 20,327,467 outstanding at March 31, 2011 22,423,666 issued and 20,469,305 outstanding at September 30, 2010 |
216 | 216 | ||||||
Paid-in capital |
458,573 | 457,725 | ||||||
Accumulated deficit |
(116,247 | ) | (139,791 | ) | ||||
Accumulated other comprehensive loss |
| (444 | ) | |||||
Treasury stock, at cost; 1,954,361 shares at March 31, 2011 and September 30, 2010 |
(44,797 | ) | (44,797 | ) | ||||
Total MedCath Corporation stockholders equity |
297,745 | 272,909 | ||||||
Noncontrolling interest |
10,850 | 9,561 | ||||||
Total equity |
308,595 | 282,470 | ||||||
Total liabilities and equity |
$ | 421,029 | $ | 494,538 | ||||
See notes to unaudited consolidated financial statements.
3
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 97,163 | $ | 96,777 | $ | 186,063 | $ | 184,607 | ||||||||
Operating expenses: |
||||||||||||||||
Personnel expense |
33,859 | 33,150 | 66,313 | 64,786 | ||||||||||||
Medical supplies expense |
23,189 | 23,581 | 42,411 | 45,688 | ||||||||||||
Bad debt expense |
10,006 | 9,931 | 19,715 | 17,437 | ||||||||||||
Other operating expenses |
22,843 | 22,296 | 46,959 | 44,640 | ||||||||||||
Pre-opening expenses |
| | | 866 | ||||||||||||
Depreciation |
4,630 | 6,124 | 9,517 | 12,064 | ||||||||||||
Impairment of long-lived assets |
19,548 | 14,700 | 19,548 | 14,700 | ||||||||||||
Loss (gain) on disposal of property, equipment
and other assets |
178 | (69 | ) | 271 | 27 | |||||||||||
Total operating expenses |
114,253 | 109,713 | 204,734 | 200,208 | ||||||||||||
Loss from operations |
(17,090 | ) | (12,936 | ) | (18,671 | ) | (15,601 | ) | ||||||||
Other income (expenses): |
||||||||||||||||
Interest expense |
(997 | ) | (1,054 | ) | (2,079 | ) | (1,999 | ) | ||||||||
Interest and other income |
50 | 15 | 539 | 85 | ||||||||||||
Gain on sale of unconsolidated affiliates |
179 | | 15,570 | | ||||||||||||
Loss on note receiveable |
| (1,507 | ) | | (1,507 | ) | ||||||||||
Equity in net earnings of unconsolidated affiliates |
1,258 | 3,092 | 1,860 | 4,608 | ||||||||||||
Total other income (expense), net |
490 | 546 | 15,890 | 1,187 | ||||||||||||
Loss from continuing operations before income taxes |
(16,600 | ) | (12,390 | ) | (2,781 | ) | (14,414 | ) | ||||||||
Income tax benefit |
(7,695 | ) | (5,639 | ) | (3,213 | ) | (6,976 | ) | ||||||||
(Loss) income from continuing operations |
(8,905 | ) | (6,751 | ) | 432 | (7,438 | ) | |||||||||
(Loss) income from discontinued operations, net of taxes |
(1,401 | ) | (1,934 | ) | 37,727 | (3,064 | ) | |||||||||
Net (loss) income |
(10,306 | ) | (8,685 | ) | 38,159 | (10,502 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
(3,189 | ) | (2,524 | ) | (14,615 | ) | (3,364 | ) | ||||||||
Net (loss) income attributable to MedCath Corporation |
$ | (13,495 | ) | $ | (11,209 | ) | $ | 23,544 | $ | (13,866 | ) | |||||
Amounts attributable to MedCath Corporation common stockholders: |
||||||||||||||||
Loss from continuing operations, net of taxes |
$ | (12,341 | ) | $ | (8,970 | ) | $ | (5,179 | ) | $ | (10,872 | ) | ||||
(Loss) income from discontinued operations, net of taxes |
(1,154 | ) | (2,239 | ) | 28,723 | (2,994 | ) | |||||||||
Net (loss) income |
$ | (13,495 | ) | $ | (11,209 | ) | $ | 23,544 | $ | (13,866 | ) | |||||
(Loss) earnings per share, basic |
||||||||||||||||
Loss from continuing operations attributable to MedCath
Corporation common stockholders |
$ | (0.61 | ) | $ | (0.46 | ) | $ | (0.26 | ) | $ | (0.55 | ) | ||||
(Loss) income from discontinued operations attributable to MedCath
Corporation common stockholders |
(0.06 | ) | (0.11 | ) | 1.43 | (0.15 | ) | |||||||||
(Loss) earnings per share, basic |
$ | (0.67 | ) | $ | (0.57 | ) | $ | 1.17 | $ | (0.70 | ) | |||||
(Loss) earnings per share, diluted |
||||||||||||||||
Loss from continuing operations attributable to MedCath
Corporation common stockholders |
$ | (0.61 | ) | $ | (0.46 | ) | $ | (0.26 | ) | $ | (0.55 | ) | ||||
(Loss) income from discontinued operations attributable to MedCath
Corporation common stockholders |
(0.06 | ) | (0.11 | ) | 1.43 | (0.15 | ) | |||||||||
(Loss) earnings per share, diluted |
$ | (0.67 | ) | $ | (0.57 | ) | $ | 1.17 | $ | (0.70 | ) | |||||
Weighted average number of shares, basic |
20,208 | 19,829 | 20,075 | 19,786 | ||||||||||||
Dilutive effect of stock options and restricted stock |
| | 6 | | ||||||||||||
Weighted average number of shares, diluted |
20,208 | 19,829 | 20,081 | 19,786 | ||||||||||||
See notes to unaudited consolidated financial statements.
4
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
Redeemable | ||||||||||||||||||||||||||||||||||||||||
Accumulated | Noncontrolling | |||||||||||||||||||||||||||||||||||||||
Other | Total | Interest | ||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Treasury Stock | Noncontrolling | Equity | (Temporary | |||||||||||||||||||||||||||||||||
Shares | Par Value | Capital | Deficit | Loss | Shares | Amount | Interest | (Permanent) | Equity) | |||||||||||||||||||||||||||||||
Balance, September 30, 2010 |
22,424 | $ | 216 | $ | 457,725 | $ | (139,791 | ) | $ | (444 | ) | 1,954 | $ | (44,797 | ) | $ | 9,561 | $ | 282,470 | $ | 11,534 | |||||||||||||||||||
Stock awards, including cancelations and
income tax benefit |
24 | | 2,854 | | | | | | 2,854 | | ||||||||||||||||||||||||||||||
Tax withholdings for vested restricted
stock awards |
(166 | ) | | (2,006 | ) | | | | | | (2,006 | ) | | |||||||||||||||||||||||||||
Distributions to noncontrolling interest |
| | | | | | | (8,293 | ) | (8,293 | ) | (3,560 | ) | |||||||||||||||||||||||||||
Other transactions impacting
noncontrolling interest |
| | | | | | | 18 | 18 | 31 | ||||||||||||||||||||||||||||||
Exercise of call of noncontrolling interest |
| | | | | | | | | (5,700 | ) | |||||||||||||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||||||||||||||
Net income |
| | | 23,544 | | | | 9,564 | 33,108 | 5,051 | ||||||||||||||||||||||||||||||
Reclassification of amounts included
in net income, net of tax benefit (*) |
| | | | 444 | | | | 444 | | ||||||||||||||||||||||||||||||
Total comprehensive loss |
33,552 | 5,051 | ||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2011 |
22,282 | $ | 216 | $ | 458,573 | $ | (116,247 | ) | $ | | 1,954 | $ | (44,797 | ) | $ | 10,850 | $ | 308,595 | $ | 7,356 | ||||||||||||||||||||
(*) | Tax expense was $286 for the six months ended March 31, 2011. |
See notes to unaudited consolidated financial statements.
5
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) |
$ | 38,159 | $ | (10,502 | ) | |||
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities: |
||||||||
(Income) loss from discontinued operations, net of taxes |
(37,727 | ) | 3,064 | |||||
Bad debt expense |
19,715 | 17,437 | ||||||
Depreciation |
9,517 | 12,064 | ||||||
Gain on sale of unconsolidated affiliates |
(15,570 | ) | | |||||
Loss on disposal of property, equipment and other assets |
271 | 27 | ||||||
Share-based compensation expense |
2,854 | 1,826 | ||||||
Amortization of loan acquisition costs |
840 | 498 | ||||||
Impairment of long-lived assets |
19,548 | 14,700 | ||||||
Equity in earnings of unconsolidated affiliates, net of distributions received |
(788 | ) | 3,899 | |||||
Deferred income taxes |
(7,886 | ) | (7,701 | ) | ||||
Change in assets and liabilities that relate to operations: |
||||||||
Accounts receivable |
(25,652 | ) | (23,322 | ) | ||||
Medical supplies |
177 | (1,436 | ) | |||||
Prepaid and other assets |
(2,106 | ) | (1,656 | ) | ||||
Accounts payable and accrued liabilities |
(6,836 | ) | 2,825 | |||||
Net cash (used in) provided by operating activities of continuing operations |
(5,484 | ) | 11,723 | |||||
Net cash (used in) provided by operating activities of discontinued operations |
(8,593 | ) | 7,185 | |||||
Net cash (used in) provided by operating activities |
(14,077 | ) | 18,908 | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(781 | ) | (13,595 | ) | ||||
Proceeds from sale of property and equipment |
428 | 86 | ||||||
Proceeds from sale of unconsolidated affiliates |
32,484 | 436 | ||||||
Net cash provided by (used in) investing activities of continuing operations |
32,131 | (13,073 | ) | |||||
Net cash provided by (used in) investing activities of discontinued operations |
194,616 | (2,271 | ) | |||||
Net cash provided by (used in) investing activities |
226,747 | (15,344 | ) | |||||
Financing activities: |
||||||||
Repayments of long-term debt |
(36,397 | ) | (7,813 | ) | ||||
Repayments of obligations under capital leases |
(1,291 | ) | (892 | ) | ||||
Distributions to noncontrolling interest |
(5,229 | ) | (7,970 | ) | ||||
Investment by noncontrolling interest |
| 109 | ||||||
Sale of equity interest in subsidiary |
| 140 | ||||||
Tax withholding of vested restricted stock awards |
(2,397 | ) | (253 | ) | ||||
Net cash used in financing activities of continuing operations |
(45,314 | ) | (16,679 | ) | ||||
Net cash used in financing activities of discontinued operations |
(52,327 | ) | (10,702 | ) | ||||
Net cash used in financing activities |
(97,641 | ) | (27,381 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
115,029 | (23,817 | ) | |||||
Cash and cash equivalents: |
||||||||
Beginning of period |
47,030 | 61,701 | ||||||
End of period |
$ | 162,059 | $ | 37,884 | ||||
Cash and cash equivalents of continuing operations |
119,735 | 23,679 | ||||||
Cash and cash equivalents of discontinued operations |
42,324 | 14,205 |
See notes to unaudited consolidated financial statements
6
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
1. Business and Basis of Presentation
MedCath Corporation (the Company) primarily focuses on providing high acuity services, including
the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in
partnership with physicians. As of March 31, 2011, the Company had ownership interests in and
operated six hospitals, including five in which the Company owned a majority interest.
As noted below under Our Strategic Options Review Process during the quarter ended December 31,
2010, the Company sold three of its majority owned hospitals that were classified as discontinued
operations and its equity interest in one of its minority owned hospitals. As a result, the
Company currently owns interests in six hospitals. Each of the Companys majority-owned hospitals
is a freestanding, licensed general acute care hospital that provides a wide range of health
services with a majority focus on cardiovascular care. Each of the Companys hospitals has a
24-hour emergency room staffed by emergency department physicians. The Companys six hospitals
that currently comprise continuing operations have 533 licensed beds and are located in: Arizona,
Arkansas, California, Louisiana, New Mexico, and Texas.
The Company accounts for all but one of its owned and operated hospitals as consolidated
subsidiaries. The Company owns a noncontrolling interest in Harlingen Medical Center as of March
31, 2011. Therefore, the Company is unable to consolidate this hospitals results of operations and
financial position, but rather is required to account for its noncontrolling interest in this
hospital as an equity-method investment.
In addition to the hospitals, the Company currently owns and/or manages seven cardiac diagnostic
and therapeutic facilities. Six of these facilities are located at hospitals operated by other
parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The
Company also operates two mobile cardiac catheterization laboratories which operate on set routes
and offer only diagnostic procedures. The Company refers to its diagnostics division as MedCath
Partners. The majority of the assets of MedCath Partners
division were sold on May 4, 2011. See Note 15.
During fiscal 2010 and fiscal 2011, the Company entered into definitive agreements to sell its
interests in Arizona Heart Hospital (AzHH), Heart Hospital of Austin (HHA) and TexSan Heart
Hospital (TexSan) whose assets, liabilities, and operations are included within discontinued
operations. AzHH, HHA and TexSan were sold on October 1, 2010, November 1, 2010 and December 31,
2010, respectively. The results of operations of these entities are reported as discontinued
operations for all periods presented. See Note 3. At March 31,
2011, MedCath Partners Division did not qualify for discontinued
operations treatment.
Our Strategic Options Review Process
On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic Options
Committee to consider the sale either of the Companys equity or the sale of its individual
hospitals and other assets. The Company retained Navigant Capital Advisors as its financial advisor
to assist in this process. Since announcing the exploration of strategic alternatives on March 1,
2010, the Company has completed several transactions, including:
| The disposition of AzHH in which the Company sold the majority of the hospitals assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010. | ||
| The disposition of the Companys wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota (Sioux Falls, SD) to Avera McKennan for $20.0 million, plus a percentage of the hospitals available cash. The transaction was completed October 1, 2010. | ||
| The disposition of HHA in which the Company and the physician owners sold substantially all of the hospitals assets to St. Davids Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010. | ||
| The disposition of the Companys approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint ventures physician partners for $7.0 million. The transaction was completed effective November 1, 2010. | ||
| The disposition of TexSan in which the Company sold the majority of the hospitals assets to Methodist Healthcare System of San Antonio for $76.25 million, plus an adjustment for retained working capital. The transaction was completed effective December 31, 2010. |
7
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Basis of Presentation The Companys unaudited interim consolidated financial statements as of
March 31, 2011 and for the three and six months ended March 31, 2011 and 2010 have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP)
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 necessary to fairly state the results of operations and financial position
for the periods presented. All intercompany transactions and balances have been eliminated.
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 disclosures are adequate to make the information presented not
misleading. The unaudited interim consolidated financial statements and notes thereto should be
read in conjunction with the Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
During the six months ended March 31, 2011, the Company has not made any material changes in the
selection or application of its critical accounting policies that were set forth in its Annual
Report on Form 10-K for the fiscal year ended September 30, 2010.
Long-Lived Assets Long-lived assets, such as property, and equipment, and purchased intangible
assets subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible impairment, the Company first
compares undiscounted cash flows expected to be generated by an asset to the carrying value of the
asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash
flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.
Fair value is determined through various valuation techniques including, but not limited to,
discounted cash flow models, quoted market values and third-party independent appraisals. The
determination of whether or not long-lived assets have become impaired involves a significant level
of judgment in the assumptions underlying the approach used to determine the estimated future cash
flows expected to result from the use of those assets. Many factors and assumptions can impact the
estimates, including the future financial results of these hospitals, how the hospitals are
operated in the future, changes in health care industry trends and regulations, and the nature and
timing of the ultimate disposition of the assets. Changes in the Companys strategy, assumptions
and/or market conditions could significantly impact these judgments and require adjustments to
recorded amounts of long-lived assets, which could change by material amounts in subsequent
periods. The impairments recognized do not include the costs of closing the hospitals or other
future operating costs, which could be substantial. Accordingly, the ultimate net cash realized
from the hospitals could be significantly less than their impaired value.
Due to a decline in operating performance at certain hospitals during the first six months of
fiscal 2010, the Company performed impairment tests using undiscounted cash flows to determine if
the carrying value of each hospitals long-lived assets were recoverable as of March 31, 2010. The
results indicated the current carrying value of the assets at those hospitals were not recoverable.
The Company compared the fair value of those assets to their respective carrying values in order
to determine the amount of impairment. The Company recognized impairment charges based on the
amount each group of assets carrying value exceeded its fair value. The Company recorded $14.7
million and $5.2 million of impairment charges to continuing operations and discontinued
operations, respectively during the fiscal quarter ended March 31, 2010. In addition, during the
second quarter of fiscal 2010, as discussed previously, the Board of Directors formed a Strategic
Options Committee to consider the sale either of the Companys equity or the sale of its individual
hospitals and other assets. In addition, the Company retained Navigant Capital Advisors as its
financial advisor to assist in this process.
Throughout the remainder of fiscal 2010 and ongoing, the Company continuously evaluates the
operating performance of the various hospitals and also evaluates the expressions of interest
received for its ownership interests in the various hospitals. As a result of such period
evaluations, the Company recorded an additional $52.2 million in impairment charges during the
third and fourth quarters of fiscal 2010 through continuing and discontinued operations. To date,
some of these assets have been sold at their carrying value. The impairment charges were
recognized in the period that new or updated information pertaining to clear market indications of
fair value became available. Such information included valid indications of interest, or signed
letters of intent from interested buyers of the underlying assets, or based on updated discounted
cash flow models using the Companys long-term forecasts for the underlying assets. The short-term
impact to the Companys forecasts have been negatively impacted in some markets by the strategic
options process as physician recruitment and the ability to implement growth strategies has become
increasingly more difficult due to the uncertainty surrounding the process.
In
the first six months of fiscal 2011, two of the Companys
hospitals experienced a decline in operating performance and during
the second quarter of 2011 negotiations with certain potential buyers
of these facilities, being conducted as a result of the
Companys strategic options process, were terminated. The Company performed impairment tests using undiscounted cash flows to determine if the
carrying value of these hospitals long-lived assets were recoverable as of March 31, 2011. The
results indicated the current carrying value of the assets at those hospitals were not recoverable.
The Company compared the fair value of those assets to their respective carrying values in order
to determine the amount of impairment. The Company recognized impairment charges based on the
amount each group of assets carrying value exceeded its fair value. The Company recorded $19.5
million of impairment charges to continuing operations during the fiscal quarter ended March 31,
2011.
8
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
See Note 14 for further discussions as to the Companys determination of fair value.
2. Recent Accounting Pronouncements
The following is a summary of new accounting pronouncements that have been adopted or that may
apply to the Company.
Recently Adopted Accounting Pronouncements
On October 1, 2010, the Company adopted a new accounting standard that amends the
consolidation guidance that applies to variable interest entities (VIE). The amendments
significantly affect the overall consolidation analysis. The provisions of this accounting standard
revise the definition and consideration of VIEs, primary beneficiary, and triggering events in
which a company must re-evaluate its conclusions as to the consolidation of an entity. The adoption
of this standard did not have an impact on the Companys consolidated financial statements.
Recent Accounting Pronouncements
In August 2010, the Financial Accounting Standards Board (the FASB) issued Accounting Standard
Updates (ASU) 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and
Related Insurance Recoveries, which clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance provided in this ASU is effective as of
the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the
Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our
consolidated financial statements.
In August 2010, the FASB issued ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity
Care for Disclosure, which requires a company in the healthcare industry to use its direct and
indirect costs of providing charity care as the measurement basis for charity care disclosures.
This ASU also requires additional disclosures of the method used to identify such costs. The
guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010,
fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our
consolidated financial position or results of operations.
3. Discontinued Operations
As required under GAAP, the Company has classified the results of operations of the following
entities within income from discontinued operations, net of taxes and the assets and liabilities of
these entities have been classified within current and non-current assets and current and long-term
liabilities of discontinued operations on the consolidated balance sheets.
During November 2010, the Company entered into an agreement to sell substantially all of the assets
of TexSan for $76.25 million, plus retained working capital. The transaction closed on December 31,
2010 with the Company retaining all accounts receivable and the hospitals remaining liabilities.
In addition, the Company acquired the partnerships minority investors ownership in accordance
with the terms of a call option agreement. See Note 7 for further discussion. The gain of $34.3
million has been included in income (loss) from discontinued operations for the six months ended
March 31, 2011.
During September 2010, the Company entered into an agreement to sell its subsidiary that provided
consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.
Such subsidiarys operations had historically been included in the Corporate and other division.
Such subsidiary was sold in October 2010 for an immaterial loss.
During August 2010, the Company entered into a definitive agreement to sell certain of the hospital
assets and liabilities, plus certain net working capital of AzHH for $32.0 million and the
assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the
limited liability company which owned AzHH retaining all accounts receivable and the hospitals
remaining liabilities. As part of its assessment of long-lived assets in June 2010, the Company
recognized an impairment charge of $5.2 million based on its potential sales value of AzHH.
Accordingly, the Company recognized a nominal gain on the sale for the six months ended March 31,
2011.
During February 2010, the Company entered into an agreement to sell substantially all of the assets
of HHA for $83.8 million plus retention of working capital to St. Davids Healthcare Partnership,
L.P. The transaction closed on November 1, 2010. The gain of $35.7 million has been included in
income (loss) from discontinued operations for the six months ended March 31, 2011.
During May 2008, the Company sold the net assets of Dayton Heart Hospital (DHH) to Good
Samaritan Hospital pursuant to a definitive agreement. As of March 31, 2011 and September 30, 2010,
the Company had reserved $10.3 million and $9.8 million, respectively, for Medicare outlier
payments received by DHH during the year ended September 30, 2004, which are included in
current liabilities of discontinued operations in the consolidated balance sheets.
9
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
The Company has entered into transition services agreements with the buyers of certain of its sold
assets that extend into fiscal 2011. As a result, the Company entered into a Managed Services
Agreement with McKesson Technologies, Inc. (McKesson) whereby McKesson would employ the majority
of the Companys information technology employees effective November 1, 2010. In addition, to
facilitate collection of outstanding accounts receivable at such entities, on February 11, 2011 the
Company entered into a Master Agreement for Revenue Cycle Outsourcing with Dell Marketing L.P.
(Dell) whereby Dell would assume the responsibility for collection of outstanding accounts
receivable for our current and disposed of entities. Furthermore, Dell retained the services of
certain employees that had been employed by the Company on or before March 7, 2011 and effective
March 1, 2011, Dell has sublet certain space that had been previously utilized by Company personnel
involved in the collection of accounts receivable.
The results of operations and the assets and liabilities of discontinued operations included in the
consolidated statements of operations and consolidated balance sheets are as follows:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | (1,250 | ) | $ | 63,045 | $ | 20,754 | $ | 122,431 | |||||||
Gain (loss) from dispositions, net |
| | 69,903 | | ||||||||||||
Loss on early termination of debt |
| | (11,130 | ) | | |||||||||||
(Loss) income before income taxes |
(2,122 | ) | (3,188 | ) | 55,640 | (4,610 | ) | |||||||||
Income tax (benefit) expense |
(721 | ) | (1,254 | ) | 17,913 | (1,546 | ) | |||||||||
Net (loss) income |
(1,401 | ) | (1,934 | ) | 37,727 | (3,064 | ) | |||||||||
Less: Net loss (income) attributable to noncontrolling interest |
247 | (305 | ) | (9,004 | ) | 70 | ||||||||||
Net income (loss) attributable to MedCath Corporation |
$ | (1,154 | ) | (2,239 | ) | $ | 28,723 | $ | (2,994 | ) | ||||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 42,324 | $ | 13,889 | ||||
Accounts receivable, net |
3,934 | 23,597 | ||||||
Other current assets |
361 | 10,434 | ||||||
Current assets of discontinued operations |
$ | 46,619 | $ | 47,920 | ||||
Property and equipment, net |
$ | | $ | 115,670 | ||||
Other assets |
1,152 | 3,620 | ||||||
Long-term assets of discontinued operations |
$ | 1,152 | $ | 119,290 | ||||
Accounts payable |
$ | 12,120 | $ | 25,379 | ||||
Accrued liabilities and current portion of
obligations under capital leases |
2,054 | 9,665 | ||||||
Current liabilities of discontinued operations |
$ | 14,174 | $ | 35,044 | ||||
Long-term debt |
$ | | $ | 35,302 | ||||
Other long-term obligations |
| 666 | ||||||
Long-term liabilities of discontinued operations |
$ | | $ | 35,968 | ||||
Included in the Companys discontinued liabilities as of September 30, 2010 is a Real Estate
Investment Trust Loan (the REIT Loan) aggregating $34.6 million. Borrowings under this REIT Loan
were collateralized by a pledge of the Companys interest in the related hospitals property,
equipment and certain other assets. The REIT Loan required monthly, interest-only payments for ten
years, at which time the loan was due in full, maturing January 2016. The interest rate on this
loan was 8 1/2%. Upon the disposition of the Companys interest in the related hospital, the REIT
Loan was repaid in full in November 2010 and the Company incurred an $11.1 million prepayment
penalty, which is included in income (loss) from discontinued operations.
10
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Included in discontinued operations are certain liabilities that the Company has retained upon the
disposition of the related entity. Because the Companys hospitals are organized as partnerships,
upon disposition of the related operations, assets and certain liabilities, the partnerships are
responsible for the resolution of outstanding payables, remaining obligations, including those
related to cost reports, medical malpractice and other obligations and wind down of the respective
tax filings of the partnership. The partnerships are also responsible for any unknown liabilities
that may arise. The Company has reported all known obligations in its consolidated balance sheets
as of March 31, 2011 and September 30, 2010.
4. Accounts Receivable
Accounts receivable, net, consists of the following:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Receivables, principally from patients and third-party payors |
$ | 119,152 | $ | 103,314 | ||||
Receivables, principally from billings to hospitals for various
cardiovascular procedures |
1,237 | 1,027 | ||||||
Other |
3,125 | 2,555 | ||||||
123,514 | 106,896 | |||||||
Less allowance for doubtful accounts |
(73,766 | ) | (63,085 | ) | ||||
Accounts receivable, net |
$ | 49,748 | $ | 43,811 | ||||
5. Investments in Affiliates
The Companys determination of the appropriate consolidation method to follow with respect to
investments in affiliates is based on the amount of control the Company has and the ownership level
in the underlying entity. Investments in entities that the Company does not control, but over whose
operations the Company has the ability to exercise significant influence (including investments
where the Company has a less than 20% ownership) are accounted for under the equity method. The
Company additionally considers if it is the primary beneficiary of (and therefore should
consolidate) any entity whose operations the Company does not control. At March 31, 2011, all of
the Companys investments in unconsolidated affiliates are accounted for using the equity method.
At March 31, 2011, the Company owns a noncontrolling interest in Harlingen Medical Center and
certain diagnostic ventures and partnerships, for which the Company neither has substantive control
over the ventures nor is the primary beneficiary. These investments are included in Other Assets on
the consolidated balance sheets.
On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New Jersey Heart
Services, LLC for $0.6 million and recognized a gain of $0.2 million.
On November 1, 2010, the Company sold its equity interest in Southwest Arizona Heart and Vascular
Center, LLC for $7.0 million. The Company recognized a $1.8 million write down of its investment
in the fourth quarter of fiscal 2010 to record the Companys investment in such business at its net
realizable value expected from the sale proceeds. Prior to its disposition, the Company had
accounted for its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity
method of accounting.
On October 1, 2010, the Company sold its interest in Avera Heart Hospital of South Dakota for
$25.1 million to Avera McKennan whereby Avera McKennan purchased a MedCath subsidiary which was the
indirect owner of a one-third ownership interest. Prior to its disposition, the Company had
accounted for its investment in Avera Heart Hospital of South Dakota using the equity method of
accounting. The Company recognized a gain on the disposition of $15.4 million. The Companys
investment in Avera Heart Hospital of South Dakota reflected its proportionate share of an interest
rate swap that the hospital had entered into. The cumulative unrealized loss of $0.5 million (net
of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with
the sale of the Companys ownership interest.
During February 2010, MedCath Partners Division of the Company sold its 15.0% interest in
Wilmington Heart Services, LLC for $0.4 million, resulting in an immaterial loss.
11
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
The following tables represent summarized combined financial information of the Companys
unconsolidated affiliates accounted for under the equity method (for those entities in which the
Company has disposed of its interest, the operating activities have been included through their
respective date of disposition):
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 34,935 | $ | 59,390 | $ | 70,903 | $ | 115,173 | ||||||||
Income from operations |
$ | 7,172 | $ | 15,116 | $ | 13,597 | $ | 23,666 | ||||||||
Net income |
$ | 5,217 | $ | 12,885 | $ | 9,657 | $ | 18,979 |
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Current assets |
$ | 33,094 | $ | 58,690 | ||||
Long-term assets |
$ | 75,953 | $ | 144,402 | ||||
Current liabilities |
$ | 13,308 | $ | 23,922 | ||||
Long-term liabilities |
$ | 96,955 | $ | 121,524 |
6. Long-Term Debt
Long-term debt consists of the following:
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Amended Credit Facility |
$ | 30,166 | $ | 66,563 | ||||
Less current portion |
(30,166 | ) | (14,063 | ) | ||||
Long-term debt |
$ | | $ | 52,500 | ||||
Senior Secured Credit Facility During November 2008, the Company amended and restated its
then outstanding senior secured credit facility (the Amended Credit Facility). The Amended Credit
Facility provided for a three-year term loan facility in the amount of $75.0 million (the Term
Loan) and a revolving credit facility in the amount of $85.0 million (the Revolver), which
included a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit
(of which $1.7 million were outstanding as of March 31, 2011 and September 30, 2010) and a $10.0
million sub-limit for swing-line loans. Borrowings under the Amended Credit Facility, excluding swing-line
loans, bore interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or
the alternate base rate plus the applicable margin. At March 31, 2011 the Term Loan bore interest
at 3.25%. The $30.2 million and $66.6 million outstanding under the Amended Credit Facility at
March 31, 2011 and September 30, 2010, respectively,
related to the Term Loan. On May 9, 2011, the Company repaid the
$30.2 million outstanding amount of the Term Loan. No amounts were
outstanding under the Revolver as of March 31, 2011 and
September 30, 2010. On May 9, 2011 concurrent with the
repayment of the Term Loan, the Amended Credit Facility was
terminated. See Note 15.
The
Amended Credit Facility required compliance with certain financial covenants including a
consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test
and a consolidated total leverage ratio test. The Amended Credit
Facility also contained customary
restrictions on, among other things, the Company and subsidiaries ability to incur liens; engage
in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and
repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions;
and enter into transactions with affiliates.
12
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
The
Amended Credit Facility contained events of default, including cross-defaults to certain
indebtedness, change of control events, and other events of default customary for syndicated
commercial credit facilities. Upon the occurrence of an event of default, the Company could be
required to immediately repay all outstanding amounts under the Amended Credit Facility.
The
Company was required to make mandatory prepayments of principal in specified amounts upon the
occurrence of certain events identified in the Amended Credit
Facility and was permitted to make
voluntary prepayments of principal under the Amended Credit Facility.
The Term Loan was subject to
amortization of principal in quarterly installments, which began March 31, 2010. The maturity date
of both the Term Loan and the Revolver is November 10, 2011.
However, the Term Loan was paid in full on May 9, 2011 and the
facility was terminated. See Note 15.
On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit
Facility (the First Amendment). The Company entered into the First Amendment to provide
additional financial and liquidity flexibility in connection with its previously announced effort
to explore strategic alternatives. The First Amendment contains modifications of certain financial
covenants and other requirements of the Amended Credit Facility; including, but not limited to:
modifications to certain definitions contained in the Amended Credit Facility, including the
definitions of certain financial terms to permit additional add backs (such as an add back for
charges and professional expenses incurred in connection with asset dispositions), subject to
maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics
derived in accordance with such definitions, for certain financial covenant calculations;
increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset
dispositions covenant to permit additional asset dispositions subject to no events of default and
require that any net cash proceeds from an asset disposition or series of dispositions in excess of
$50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan
amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver
or cash collateralize letters of credit to the extent outstanding and permanently reduce the
Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the
amount of such permanent commitment reductions. In addition, any mandatory prepayments of the
Revolver will also reduce the revolving credit commitment by a corresponding amount.
In addition to the quarterly installments, during the three and six months ended March 31, 2011,
the Company paid $26.8 million and $31.9 million, respectively, using net cash proceeds from asset
dispositions. The Revolver including letters of credit will not be permitted to remain outstanding
after the full repayment of the Term Loan. The First Amendment also provided for a reduction in
amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. As
noted under the terms of the First Amendment, the Revolver was further reduced to $27.6 million at
March 31, 2011 for mandatory repayment of principal using net cash proceeds from asset
dispositions. Under terms of the First Amendment, the fixed charge coverage ratio was not required
to be tested at September 30, 2010 or December 31, 2010, and was tested at March 31, 2011.
Debt Covenants As of March 31, 2011 and September 30, 2010, the Company was in compliance with
all covenants governing its outstanding debt.
Interest Rate Swap During the year ended September 30, 2006 one of the hospitals
in which the Company had a noncontrolling interest and accounted for under the equity method,
entered into an interest rate swap for purposes of hedging variable interest payments on long term
debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by
the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive
income of the hospital. The Company recorded its proportionate share of comprehensive income within
stockholders equity in the consolidated balance sheets based on the Companys ownership interest
in that hospital. However, as noted in Note 5, the cumulative unrealized loss of $0.5 million (net
of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with
the sale of the Companys ownership interest on October 1, 2010.
7. Contingencies and Commitments
Put and Call Options During August 2010, the Company entered into a put/call agreement with the
minority shareholders of one of its hospitals, whereby call and put options were added relative to
the Companys noncontrolling interest in the hospital. The call allowed the Company to acquire all
of the noncontrolling interest in the hospital owned by physician investors for the net amount of
the physician investors unreturned capital contributions adjusted upward for any proportionate
share of additional proceeds upon a disposition transaction. The put allowed the Companys
noncontrolling shareholders in the hospital to put their shares to the Company for the net amount
of the physician investors unreturned capital contributions. The noncontrolling shareholders
recorded basis in their partnership interest was zero prior to the amendment of this agreement.
Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9
million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its
call right and recognized additional redeemable noncontrolling interest of $2.2 million.
Furthermore, upon exercise, the
Company converted the outstanding balance of the noncontrolling interest in this partnership
together with amounts due from the noncontrolling shareholders into a net obligation of $5.7
million, of which $4.6 million was paid during the quarter ended March 31, 2011 and $1.1 million
remains in other accrued liabilities as of March 31, 2011.
13
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
During September 2010, the Company entered into a call agreement with other shareholders of one of
its hospitals whereby the Company may exercise the call right to purchase the noncontrolling
interest owned by physician investors for an amount equal to the net amount of the physician
investors unreturned capital contributions ($2.7 million at March 31, 2011 and September 30, 2010).
In January 2011, the Company entered into an agreement with the noncontrolling shareholders of one
of its hospitals whereby the Company obtained the right to sell all or substantially all of the
assets of that hospital. Concurrent with such amendment and as a condition thereto, an approval,
consent and proxy were obtained from the Companys noncontrolling members in the hospital. The
approval, consent and proxy allows the Company to sell all or substantially all of the assets of
that hospital and the Company will pay to the noncontrolling members the net amount of their
unreturned capital contributions ($3.5 million at March 31, 2011) adjusted upward for any
proportionate share of additional proceeds upon a disposition transaction.
Contingencies The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings, court decisions,
executive orders and freezes and funding reductions, all of which may significantly affect the
Company. In addition, reimbursement is generally subject to adjustment following audit by third
party payors, including commercial payors as well as the contractors who administer the Medicare
program for the Centers for Medicare and Medicaid Services (CMS).
Final determination of amounts due providers under the Medicare program often takes several years
because of such audits, as well as resulting provider appeals and the application of technical
reimbursement provisions. The Company believes that adequate provisions have been made for any
adjustments that might result from these programs; however, due to the complexity of laws and
regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted
and the other complexities involved in estimating net revenue, there is a possibility that recorded
estimates will change by a material amount in the future.
CMS uses recovery audit contractors (RAC) to detect Medicare overpayments not identified through
existing claims review mechanisms. RACs perform post-discharge audits of medical records to
identify Medicare overpayments resulting from incorrect payment amounts, non-covered services,
incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back
at claims up to three years old, provided that the claim was paid on or after October 1, 2007.
Claims identified as overpayments will be subject to the Medicare appeals process. The Health Care
Reform Laws expanded the RAC programs scope to include Medicaid claims by requiring all states to
enter into contracts with RACs by December 31, 2010. The Company believes the claims for
reimbursement submitted to the Medicare and Medicaid programs by the Companys facilities have been
accurate, however the Company is unable to reasonably estimate what the potential result of future
RAC audits or other reimbursement matters could be.
The Company is involved in various claims and legal actions in the ordinary course of
business, including malpractice claims arising from services provided to patients that have been
asserted by various claimants and additional claims that may be asserted for known incidents
through March 31, 2011. These claims and legal actions are in various stages, and some may
ultimately be brought to trial. Moreover, additional claims arising from services provided to
patients in the past and other legal actions may be asserted in the future. The Company is
protecting its interests in all such claims and actions and does not expect the ultimate resolution
of these matters to have a material adverse impact on the Companys consolidated financial
position, results of operations or cash flows.
During fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to
carotid artery stent procedures performed during prior fiscal years at two of the Companys
hospitals. The U.S. Department of Justice (DOJ) initiated an investigation related to the
Companys return of these reimbursements. As a result of the DOJs investigation, the Company
negotiated settlement agreements with the DOJ whereby the Company paid $0.8 million to settle and
obtain releases from any federal civil false claims liability related to the DOJs investigation.
The DOJ allegations did not involve patient care, and related solely to whether the procedures were
properly reimbursable by Medicare. The settlement did not include any finding of wrong-doing or any
admission of liability. Both settlement agreements were executed during fiscal 2010.
In March 2010, the DOJ issued a civil investigative demand (CID) pursuant to the federal False
Claims Act to one of our hospitals. The CID requested information regarding Medicare claims
submitted by our hospital in connection with the implantation of implantable cardioverter
defibrillators (ICDs) during the period 2002 to the present. The Company has complied with all
information requested by the DOJ for this hospital. The Company is unable to evaluate the outcome
of this investigation at this time; however ICD revenue is a material component of total net
revenue for this hospital and the results of this investigation could have a material adverse
effect on the Companys financial condition, results of operations and cash flows.
14
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
In September 2010, the Company received a letter from the DOJ advising it that an investigation is
being conducted to determine whether certain of the Companys other hospitals have submitted claims
excluded from coverage. The period of time covered by the investigation is 2003 to the present. The
letter states that the DOJs data indicate that many of the Companys hospitals have claims for the
implantation of ICDs which were not medically indicated and/or otherwise violated Medicare payment
policy. Management understands that the DOJ has submitted similar requests to many other hospitals
and hospital systems across the country as well as to the ICD manufacturers themselves. The Company
is fully cooperating with the DOJ, is actively engaged in discussions with the DOJ regarding the
issues involved in the investigation and has entered into a tolling agreement with the government
in this investigation. The Company has met with the DOJ on one occasion to provide examples of the
Companys documentation for such ICD cases related to one of its other hospitals. To date, the DOJ
has not asserted any claim against the Companys hospitals and the Company expects to continue to
have input into the investigation. Because the Company is in the early stages of this
investigation, the Company is unable to evaluate the outcome of this investigation. The Companys
total ICD net revenue is a material component of total net patient revenue and the results of this
investigation could have a material adverse effect on the Companys financial condition, results of
operations and cash flows.
On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v.
Northridge Emergency Medical Group, et al. (2009) 45 Cal. 4th 497, that under
Californias Knox-Keene statute healthcare providers may not bill patients for covered emergency
out-patient services for which health plans or capitated payors are invoiced by the provider but
fail to pay the provider. The California Supreme Court held that the only recourse for healthcare
providers is to pursue the payors directly. The Prospect decision does not apply to amounts that
the health plan or capitated payor is not obligated to pay under the terms of the insureds policy
or plan. Although the decision only considered emergency providers and referred to HMOs and
capitated payors, future court decisions on how the so-called balance billing statute is
interpreted does pose a risk to healthcare providers that perform emergency or other out-patient
services in the state of California.
During October, 2009, a purported class action law suit was filed by an individual against the
Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the
plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare
Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits
the practice of balance billing for patients who are provided emergency services. On November 24,
2010, the court granted the Bakersfield Heart Hospitals motion to strike plaintiffs class
allegations.
During June 2010 and 2009, the Company entered into a one-year claims-made policy providing
coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per
claim. The Company also purchased additional insurance to reduce the retained liability per claim
to $250,000 for the MedCath Partners Division, for each respective fiscal year. Because of the
Companys self-insured retention levels, the Company is required to recognize an estimated
expense/liability for the amount of retained liability applicable to each malpractice claim. As of
March 31, 2011 and September 30, 2010, the total estimated liability for the Companys self-insured
retention on medical malpractice claims, including an estimated amount for incurred but not
reported claims, was $2.5 million and $2.7 million,
respectively which is included in other accrued liabilities in the
consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using
the Companys historical experience with claims and assumptions about future events.
In addition to reserves for medical malpractice, the Company also maintains reserves for
self-insured workmans compensation, healthcare and dental coverage. As of October 9, 2010, the
Company entered into a guaranteed cost plan for workmans compensation. The Company was also
covered by a guaranteed cost program up to September 2007. From October 2007 through 2010, the
Company was self-insured with loss limitations of $250,000 per occurrence with no annual aggregate
limits. The total estimated reserve for self-insured liabilities for workmans compensation,
employee health and dental claims was $2.5 million and $3.3 million as of March 31, 2011 and
September 30, 2010, respectively, which is included in other accrued liabilities in the
consolidated balance sheets. The Company maintains this reserve based on historical experience with
claims. The Company maintains commercial stop loss coverage for health and dental insurance
programs of $175,000 per plan participant.
Commitments The Companys consolidated subsidiary hospitals provide guarantees to certain
physician groups for funds required to operate and maintain services for the benefit of the
hospitals patients including emergency care and anesthesiology services, among other services.
These guarantees extend for the duration of the underlying service agreements. As of March 31,
2011, the maximum potential future payments that the Company could be required to make under these
guarantees was $26.5 million through June 2013. At March 31, 2011 the Company had total liabilities
of $9.2 million for the fair value of these guarantees, of which $7.0 million is in other accrued
liabilities and $2.2 million is in other long term obligations. Additionally, the Company had
assets of $9.6 million
representing the future services to be provided by the physicians, of which $7.0 million is in
prepaid expenses and other current assets and $2.6 million is in other assets.
15
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
8. Earnings per Share Data
Basic The calculation of basic earnings per share includes 194,100 and 177,400 of restricted
stock units that have vested but as of March 31, 2011 and 2010, respectively, have not been
converted into common stock.
Diluted The calculation of diluted earnings per share considers the potential dilutive effect
of options to purchase 854,812 and 975,637 shares of common stock at prices ranging from $9.95 to
$33.05, which were outstanding at March 31, 2011 and 2010,
respectively, as well as 281,912 and
848,300 shares of restricted stock which were outstanding at March 31, 2011 and 2010, respectively.
No options or restricted stock were included in the calculation of diluted earnings per share for
the three months ended March 31, 2011, as the consideration of such shares would be anti-dilutive
due to the loss from continuing operations, net of tax. Dilutive options of 5,799 have been
included in the calculation of diluted earnings (loss) per share for the six months ended March 31,
2011. Of the outstanding stock options, 824,000 options have not been included in the calculation
of diluted earnings per share for the six months ended March 31, 2011, because the options were
anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings
per share for the three and six months ended March 31, 2010, as the consideration of such shares
would be anti-dilutive due to the loss from continuing operations, net of tax.
9. Stock Based Compensation
Compensation expense from the grant of equity awards made to employees and directors are recognized
based on the estimated fair value of each award over each applicable awards vesting period. The
Company estimates the fair value of equity awards on the date of grant using, either an
option-pricing model for stock options or the closing market price of the Companys stock for
restricted stock and restricted stock units. Stock based compensation expense is recognized on a
straight-line basis over the requisite service period for the awards that are ultimately expected
to vest. Stock based compensation expense recorded during the three and six months ended March 31,
2011 was $0.9 million and $2.9 million, respectively. The associated tax benefits related to the
compensation expense recognized for the three and six months ended March 31, 2011 was $0.4 million
and $1.1 million, respectively. Stock based compensation expense recorded during the three and six
months ended March 31, 2010 was $1.2 million and $1.8 million, respectively. The associated tax
benefits related to the compensation expense recognized for the three and six months ended March
31, 2010 was $0.5 million and $0.7 million, respectively.
Stock Options
The following tables summarize the Companys stock option activity:
For the Three Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Stock Options | Exercise Price | Stock Options | Exercise Price | |||||||||||||
Outstanding stock options, beginning of period |
913,812 | $ | 21.89 | 986,637 | $ | 22.23 | ||||||||||
Cancelled |
(59,000 | ) | 22.27 | (11,000 | ) | 29.49 | ||||||||||
Outstanding stock options, end of period |
854,812 | $ | 21.86 | 975,637 | $ | 22.14 | ||||||||||
For the Six Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Stock Options | Exercise Price | Stock Options | Exercise Price | |||||||||||||
Outstanding stock options, beginning of period |
932,137 | $ | 21.89 | 1,027,387 | $ | 22.25 | ||||||||||
Cancelled |
(77,325 | ) | 22.16 | (51,750 | ) | 24.33 | ||||||||||
Outstanding stock options, end of period |
854,812 | $ | 21.86 | 975,637 | $ | 22.14 | ||||||||||
16
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Restricted Stock Awards
During the three and six months ended March 31, 2011, the Company did not grant any shares of
restricted stock to employees. During the three and six months ended March 31, 2010, the Company
granted to employees 32,235 and 401,399 shares of restricted stock, respectively. Restricted stock
granted to employees, excluding executives of the Company, vest annually on December 31 over a
three year period. Executives of the Company (defined by the Company as vice president or higher)
received two equal grants of restricted stock. The first grant vests annually in equal installments
on December 31 over a three year period. The second grant vests annually on December 31 over a
three year period if certain performance conditions are met. All unvested restricted stock granted
to employees becomes fully vested upon a change in control of the Company as defined in the
Companys 2006 Stock Option and Award Plan. During the three and six months ended March 31, 2011,
the Company granted 43,200 shares of restricted stock units to directors. During the three and six
months ended March 31, 2010, the Company granted 89,600 shares of restricted stock units to
directors. Restricted stock units granted to directors are fully vested at the date of grant and
are paid in shares of common stock upon each applicable directors termination of service on the
board. At March 31, 2011, the Company had $1.4 million of unrecognized compensation expense
associated with restricted stock awards.
The following tables summarize the Companys restricted stock award activity:
For the Three Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Number of | Number of | |||||||||||||||
Restricted | Weighted- | Restricted | Weighted- | |||||||||||||
Stock Awards | Average | Stock Awards | Average | |||||||||||||
and Units | Grant Price | and Units | Grant Price | |||||||||||||
Outstanding restricted stock awards and units, beginning of period |
460,305 | $ | 7.99 | 923,270 | $ | 8.54 | ||||||||||
Granted |
43,200 | 13.89 | 121,835 | 8.01 | ||||||||||||
Vested |
(11,192 | ) | 7.97 | (13,700 | ) | 7.33 | ||||||||||
Cancelled |
(16,301 | ) | 7.78 | (5,705 | ) | 9.21 | ||||||||||
Outstanding restricted stock awards and units, end of period |
476,012 | $ | 8.53 | 1,025,700 | $ | 8.49 | ||||||||||
For the Six Months Ended | ||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Number of | Number of | |||||||||||||||
Restricted | Weighted- | Restricted | Weighted- | |||||||||||||
Stock Awards | Average | Stock Awards | Average | |||||||||||||
and Units | Grant Price | and Units | Grant Price | |||||||||||||
Outstanding restricted stock awards and units, beginning of period |
884,285 | $ | 8.67 | 654,327 | $ | 9.64 | ||||||||||
Granted |
43,200 | 13.89 | 490,999 | 7.24 | ||||||||||||
Vested |
(435,172 | ) | 9.38 | (103,895 | ) | 9.04 | ||||||||||
Cancelled |
(16,301 | ) | 7.78 | (15,731 | ) | 9.10 | ||||||||||
Outstanding restricted stock awards and units, end of period |
476,012 | $ | 8.53 | 1,025,700 | $ | 8.49 | ||||||||||
17
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
10. Reportable Segment Information
At
March 31, 2011, the Companys reportable segments consist of the Hospital Division and the MedCath Partners
Division.
Financial information concerning the Companys operations by each of the reportable segments as of
and for the periods indicated is as follows:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue: |
||||||||||||||||
Hospital Division |
$ | 94,996 | $ | 93,881 | $ | 181,614 | $ | 178,263 | ||||||||
MedCath Partners Division |
2,057 | 2,786 | 4,285 | 6,122 | ||||||||||||
Corporate and other |
110 | 110 | 164 | 222 | ||||||||||||
Consolidated totals |
$ | 97,163 | $ | 96,777 | $ | 186,063 | $ | 184,607 | ||||||||
(Loss) income from operations: |
||||||||||||||||
Hospital Division |
$ | (13,621 | ) | $ | (9,363 | ) | $ | (9,616 | ) | $ | (9,381 | ) | ||||
MedCath Partners Division |
77 | (189 | ) | 121 | (364 | ) | ||||||||||
Corporate and other |
(3,546 | ) | (3,384 | ) | (9,176 | ) | (5,856 | ) | ||||||||
Consolidated totals |
$ | (17,090 | ) | $ | (12,936 | ) | $ | (18,671 | ) | $ | (15,601 | ) | ||||
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Aggregate identifiable assets: |
||||||||
Hospital Division |
$ | 266,515 | $ | 414,656 | ||||
MedCath Partners Division |
10,314 | 20,210 | ||||||
Corporate and other |
144,200 | 59,672 | ||||||
Consolidated totals |
$ | 421,029 | $ | 494,538 | ||||
Substantially all of the Companys net revenue in its Hospital Division and MedCath Partners
Division is derived directly or indirectly from patient services. The amounts presented for
corporate and other primarily include general overhead and administrative expenses and financing
activities as components of (loss) income from operations and certain cash and cash equivalents,
prepaid expenses, other assets and operations of the business not subject to separate segment
reporting within identifiable assets.
On
May 4, 2011, the Company sold substantially all the assets of the
MedCath Partners Division.
The Hospital Division assets include $46.3 million and $165.7 million of assets related to
discontinued operations as of March 31, 2011 and September 30, 2010, respectively.
11. Business Ownership Changes
Change in Ownership Due to Cancellation of Stock Subscription Receivable Upon the formation of
Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements
whereby they paid for their ownership in two installments. At the date of formation, the amount
due from the minority owners was recorded as a stock subscription receivable. During the fourth
quarter of fiscal 2010, several minority owners did not submit the final installment. As a result,
and per the partnership operating agreement, the proportionate ownership was transferred to the
Company and the stock subscription receivable was reduced accordingly. As a result, the Companys
ownership in HMMC increased from 79.00% to 82.49%.
18
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
12. Comprehensive (Loss) Income
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income |
$ | (10,306 | ) | $ | (8,685 | ) | $ | 38,159 | $ | (10,502 | ) | |||||
Changes in fair value of interest rate swap,
net of tax benefit |
| (24 | ) | | 32 | |||||||||||
Reclassification of amounts included in net income,
net of tax expense |
| | 444 | | ||||||||||||
Comprehensive (loss) income |
(10,306 | ) | (8,709 | ) | 38,603 | (10,470 | ) | |||||||||
Less: Net income attributable to noncontrolling interest |
(3,189 | ) | (2,524 | ) | (14,615 | ) | (3,364 | ) | ||||||||
Comprehensive (loss) income attributable to
MedCath Corporation common stockholders |
$ | (13,495 | ) | $ | (11,233 | ) | $ | 23,988 | $ | (13,834 | ) | |||||
13. Property and Equipment
March 31, | September 30, | |||||||
2011 | 2010 | |||||||
Land |
$ | 16,518 | $ | 17,635 | ||||
Buildings |
137,577 | 149,897 | ||||||
Equipment |
149,918 | 163,746 | ||||||
Construction in progress |
83 | 25 | ||||||
Total, at cost |
304,096 | 331,303 | ||||||
Less accumulated depreciation |
(150,627 | ) | (149,081 | ) | ||||
Property and equipment, net |
$ | 153,469 | $ | 182,222 | ||||
The Company recorded $19.5 million of impairment charges to the consolidated statement of
operations during the second quarter ended March 31, 2011. See Note 1 for further discussion
related to these impairment charges.
14. Fair Value Measurements
The Companys non-financial assets and liabilities not permitted or required to be measured at fair
value on a recurring basis typically relate to long-lived assets held and used and long-lived
assets held for sale (including investments in affiliates). Fair values are determined as follows:
| Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities. | ||
| Level 2 inputs utilize data points that are observable, such as independent third party market offers. | ||
| Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of discounted cash flows or third party appraisals. |
Impairment | ||||||||||||||||
for the three | ||||||||||||||||
Quoted | Significant | and six month | ||||||||||||||
Market | Significant Other | Unobservable | period ended | |||||||||||||
Price | Observable Inputs | Inputs | March 31, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2011 | |||||||||||||
Long-lived assets held and used |
$ | | $ | | $ | 44,700 | $ | (19,548 | ) |
19
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
As described in Note 1, the Company recorded an impairment charge of $19.5 million for the
write-down of buildings and equipment
in the Hospital Division. The charge relates to two of the Companys hospitals in which there was
a decline in the estimated fair value of fixed assets based on market
based sales of comparable assets as well as a decline in estimated discounted cash flows.
Based on Level 2 inputs, the fair value of long-term debt, including the current portion, at March
31, 2011 approximates the carrying value. Based on Level 2 inputs, the fair value of long-term
debt, including the current portion, at September 30, 2010 was $108.1 million ($41.5 million
related to discontinued operations) as compared to carrying values of $101.2 million ($34.6 million
related to discontinued operations). The fair value of the Companys variable rate debt was
determined to approximate its carrying value due to the underlying variable interest rates.
The Companys cash equivalents are measured utilizing Level 1 inputs.
15. Subsequent Events
On May 4, 2011 the Company sold the majority of the assets of its MedCath Partners division to
DLP Healthcare, a joint venture of LifePoint Hospitals and Duke University Health System.
The transaction valued the assets acquired at $25.0 million and involved the sale of certain
North Carolina-based assets related to the operation of cardiac catheterization laboratories in
North Carolina. MedCath will retain working capital related to the assets sold and will also
retain assets related to cath labs leased to two health care systems outside of North Carolina as
well as its minority ownership in Coastal Carolina Heart. Further, MedCath will retain certain
assets and liabilities arising from this business that arose before closing.
On May 5, 2011 the Company sold its 9.2% membership interest in Coastal Carolina Heart for $5.0
million to New Hanover Regional Medical Center.
On May 9, 2011 the Company used the net proceeds from the sale of MedCath Partners assets, along
with available cash, to repay the $30.2 million outstanding under its credit facility and also
terminated the facility on that date.
On
May 9, 2011, the Company announced it had entered into definitive
agreements to sell its equity in Arkansas Heart Hospital and, along with it physician partners, to
sell certain assets and liabilities of Heart Hospital of New Mexico (the Transactions). The
closing of the Transactions is conditioned upon, among other customary conditions, approval of the
holders of a majority of the shares of the Companys common stock. The Company anticipates that it
will receive approximately $60.0 million from the sale of its equity in AHH after the payment of
taxes and closing costs and approximately $62.0 million from the sale of HHNM after liquidation of
retained net working capital and the payment of taxes and closing costs.
In addition to seeking shareholder approval of the Transactions, the Company will simultaneously
seek approval of a plan of dissolution. Upon adoption of the plan of dissolution (the
Dissolution), the Company will wind up its affairs and distribute its assets in the form of a
distribution to shareholders.
The Companys shareholders are urged to read the proxy statement which the Corporation anticipates
it will file with the Securities and Exchange Commission during its third fiscal quarter ending
June 30, 2011 because it will contain important information about the Transactions, the Dissolution,
the solicitation of proxies and related matters. The proxy statement will be available for free at
the Securities and Exchange Commissions website and from the Company.
20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the interim unaudited consolidated financial statements and related
notes included elsewhere in this report, as well as the audited consolidated financial statements
and related notes thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2010.
Overview
General. We are a healthcare provider focused primarily on providing high acuity services,
including the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in
partnership with physicians whom we believe have established reputations for clinical excellence.
As noted below, during the first quarter of fiscal 2011, we sold three of our majority owned
hospitals and our equity interest in one of our minority owned hospitals. As a result, at March
31, 2011, we currently own interests in six hospitals, with a total of 533 licensed beds, of which
489 are staffed and available, and that are located in: Arizona, Arkansas, California, Louisiana,
New Mexico and Texas. Each of our majority-owned hospitals is a freestanding, licensed general
acute care hospital that provides a wide range of health services with a majority focus on
cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency
department physicians.
In
addition to our hospitals, we previously owned or managed seven cardiac diagnostic and
therapeutic facilities. Six of these facilities were located at hospitals operated by other parties.
These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The
remaining facility is not located at a hospital and offers only diagnostic procedures. The Company
also operated two mobile cardiac catheterization laboratories which operate on set routes and offer
only diagnostic procedures. We refer to our diagnostics division as
MedCath Partners. On May 4, 2011, the Company sold
substantially all the assets of MedCath Partners to DLP Healthcare.
On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee
to consider the sale either of the Company or the sale of our individual hospitals and other
assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process.
Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed
several transactions, including the disposition of Arizona Heart Hospital, the disposition of our
wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota, the
disposition of Heart Hospital of Austin, the disposition of our approximate 27.0% ownership
interest in Southwest Arizona Heart and Vascular, LLC, and the disposition of TexSan Heart
Hospital. Since the completion of these sales, we have received $113.9 million in total cash
proceeds and currently estimate that we may receive an additional
$25.0 million after we complete the
liquidation of any remaining working capital and the estimated payment of income taxes for the
legal entities we continue to own, but prior to any estimate for any unknown
liabilities/contingencies. This estimate will be updated periodically during the wind-down of
these entities.
Since March 1, 2010, we have incurred approximately $11.9 million in expenses directly related to
the strategic options process. These costs include legal, consulting, board fees, retention
bonuses and closing costs related to transactions. Our strategic options costs will continue to be
material and we may incur material costs related to contingencies that are currently unknown.
We cannot assure our investors that our continuing efforts to enhance stockholder value will be
successful, or whether future transactions will involve a sale of the Company, a sale of our
individual hospitals or other assets, or a combination of these alternatives. We continue to
consider all practicable alternatives to maximize stockholder value. Although the strategic
options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond,
we have begun to consider a number of scenarios for distributing available cash to our stockholders
such as special cash dividends and/or distributions to stockholders following future sales of
individual hospitals or other assets or, in the context of a dissolution. If our common equity is sold in a merger or
other similar transaction, then stockholders would receive consideration in exchange for their
shares in accordance with the terms of that transaction.
21
Table of Contents
Many unknown variables, including those related to seeking any approvals which may be required,
will affect the amount, timing and mechanics of any potential distributions to stockholders. Until
further progress is made in the strategic options process, we are unable to determine the approach
that best meets the interests of our stockholders. Final amounts available to stockholders will be
diminished by asset and corporate wind-down related operating and other expenses, continued debt
service obligations, tax treatment, inability to collect all amounts owed to us and any required
reserves to address liabilities, including retained and contingent liabilities and/or other
unforeseen events.
Revenue Sources by Division. The largest percentage of our net revenue is attributable to our
hospital division. On May 4, 2011, the Company sold the
majority of its assets of the MedCath Partners Division. The following table sets forth the percentage contribution of each of our
consolidating divisions to consolidated net revenue in the periods indicated below.
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
Division | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Hospital |
97.8 | % | 97.0 | % | 97.6 | % | 96.6 | % | ||||||||
MedCath Partners |
2.1 | % | 2.9 | % | 2.3 | % | 3.3 | % | ||||||||
Corporate and other |
0.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||
Net Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Revenue Sources by Payor. We receive payments for our services rendered to patients from the
Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our
patients directly. Generally, our net revenue is impacted by a number of factors, including the
payor mix, the number and nature of procedures performed and the rate of payment for the
procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the
proportion of net revenue we derive from the Medicare program is higher than that of most general
acute care hospitals.
The following table sets forth the percentage of consolidated net revenue we earned by category of
admitting payor in the periods indicated.
Consolidated | Consolidated | |||||||||||||||
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
Payor | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Medicare |
51.1 | % | 50.1 | % | 52.3 | % | 52.1 | % | ||||||||
Medicaid |
3.3 | % | 3.8 | % | 4.0 | % | 3.8 | % | ||||||||
Commercial and other, including self-pay |
45.6 | % | 46.1 | % | 43.7 | % | 44.1 | % | ||||||||
Total consolidated net revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
A significant portion of our net revenue is derived from federal and state governmental
healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive
from the Medicare program as a percentage of total consolidated net revenue will remain significant
in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement,
market and industry trends with self-pay patients, and other similar factors.
The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and
prospective rate adjustments, administrative rulings, court decisions, audits, investigations,
executive orders and freezes and funding reductions, all of which may significantly affect our
business. In addition, reimbursement is generally subject to adjustment and possible recoupment
following audit by all third party payors, including commercial payors and the contractors who
administer the Medicare program for the Center for Medicare and Medicaid Services (CMS) as well
as the Office of Inspector General. Final determination of amounts due providers under the Medicare
program often takes several years because of such audits, as well as resulting provider appeals and
the application of technical reimbursement provisions. We believe that adequate provision has been
made for any adjustments that might result from these programs; however, due to the complexity of
laws and regulations governing the Medicare and Medicaid programs, the manner in which they are
interpreted and the other complexities involved in estimating our net revenue, there is a
possibility that recorded estimates will change by a material amount in the future.
22
Table of Contents
Results of Operations
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Statement of Operations Data. The following table presents our results of operations in dollars and
as a percentage of net revenue for the periods indicated:
Three Months Ended March 31, | ||||||||||||||||||||
(in thousands except percentages) | ||||||||||||||||||||
Increase/ | ||||||||||||||||||||
(Decrease) | % of Net Revenue | |||||||||||||||||||
2011 | 2010 | % | 2011 | 2010 | ||||||||||||||||
Net revenue |
$ | 97,163 | $ | 96,777 | 0.4 | % | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel expense |
33,859 | 33,150 | 2.1 | % | 34.8 | % | 34.3 | % | ||||||||||||
Medical supplies expense |
23,189 | 23,581 | (1.7 | )% | 23.9 | % | 24.4 | % | ||||||||||||
Bad debt expense |
10,006 | 9,931 | 0.8 | % | 10.4 | % | 10.3 | % | ||||||||||||
Other operating expenses |
22,843 | 22,296 | 2.5 | % | 23.5 | % | 23.0 | % | ||||||||||||
Depreciation |
4,630 | 6,124 | (24.4 | )% | 4.8 | % | 6.2 | % | ||||||||||||
Impairment of long-lived assets |
19,548 | 14,700 | 100.0 | % | 20.1 | % | 15.2 | % | ||||||||||||
Loss (gain) on disposal of property, equipment and other assets |
178 | (69 | ) | (358.0 | )% | | (0.1 | )% | ||||||||||||
Loss from operations |
(17,090 | ) | (12,936 | ) | 32.1 | % | (17.7 | )% | (13.4 | )% | ||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest expense |
(997 | ) | (1,054 | ) | 5.4 | % | (0.9 | )% | (1.1 | )% | ||||||||||
Interest and other income |
50 | 15 | 233.3 | % | 0.1 | % | 0.0 | % | ||||||||||||
Gain on sale of unconsolidated affiliates |
179 | | N/M | 0.2 | % | | ||||||||||||||
Loss on note receiveable |
| (1,507 | ) | (100.0 | )% | | | |||||||||||||
Equity in net earnings of unconsolidated affiliates |
1,258 | 3,092 | (59.3 | )% | 1.3 | % | 3.2 | % | ||||||||||||
Loss from continuing operations before income taxes |
(16,600 | ) | (12,390 | ) | 34.0 | % | (17.1 | )% | (12.8 | )% | ||||||||||
Income tax benefit |
(7,695 | ) | (5,639 | ) | 36.5 | % | (7.9 | )% | (5.8 | )% | ||||||||||
Loss from continuing operations |
(8,905 | ) | (6,751 | ) | 31.9 | % | (9.2 | )% | (7.0 | )% | ||||||||||
Loss from discontinued operations, net of taxes |
(1,401 | ) | (1,934 | ) | (27.6 | )% | (1.4 | )% | (2.0 | )% | ||||||||||
Net loss |
(10,306 | ) | (8,685 | ) | 18.7 | % | (10.6 | )% | (9.0 | )% | ||||||||||
Less: Net income attributable to noncontrolling interest |
(3,189 | ) | (2,524 | ) | 26.3 | % | (3.3 | )% | (2.6 | )% | ||||||||||
Net loss attributable to MedCath Corporation |
$ | (13,495 | ) | $ | (11,209 | ) | 20.4 | % | (13.9 | )% | (11.6 | )% | ||||||||
Amounts attributable to MedCath Corporation common stockholders: |
||||||||||||||||||||
Loss from continuing operations, net of taxes |
$ | (12,341 | ) | $ | (8,970 | ) | 37.6 | % | (12.7 | )% | (9.3 | )% | ||||||||
Loss from discontinued operations, net of taxes |
(1,154 | ) | (2,239 | ) | (48.5 | )% | (1.2 | )% | (2.2 | )% | ||||||||||
Net loss |
$ | (13,495 | ) | $ | (11,209 | ) | 20.4 | % | (13.9 | )% | (11.6 | )% | ||||||||
Three Months Ended March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
Selected Operating Data (a): |
||||||||||||
Number of hospitals |
5 | 5 | ||||||||||
Licensed beds (b) |
421 | 421 | ||||||||||
Staffed and available beds (c) |
380 | 380 | ||||||||||
Admissions (d) |
4,905 | 4,918 | (0.3 | )% | ||||||||
Adjusted admissions (e) |
7,231 | 7,257 | (0.4 | )% | ||||||||
Patient days (f) |
18,840 | 18,690 | 0.8 | % | ||||||||
Adjusted patient days (g) |
28,018 | 27,626 | 1.4 | % | ||||||||
Average length of stay (days) (h) |
3.84 | 3.80 | 1.0 | % | ||||||||
Occupancy (i) |
55.1 | % | 54.6 | % | ||||||||
Inpatient catheterization procedures (j) |
1,940 | 2,054 | (5.6 | )% | ||||||||
Inpatient surgical procedures (k) |
1,187 | 1,171 | 1.4 | % | ||||||||
Hospital net revenue (in thousands except percentages) |
$ | 94,996 | $ | 93,881 | 1.2 | % |
23
Table of Contents
(a) | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements. | |
(b) | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use. | |
(c) | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. | |
(d) | Admissions represent the number of patients admitted for inpatient treatment. | |
(e) | Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. | |
(f) | Patient days represent the total number of days of care provided to inpatients. | |
(g) | Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. | |
(h) | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. | |
(i) | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds. | |
(j) | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals catheterization labs during the period. | |
(k) | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
Net Revenue. Our consolidated net revenue increased 0.4% or $0.4 million, to $97.2 million for the
second quarter of fiscal 2011 from $96.8 million for the second quarter of fiscal 2010. Hospital
Division net revenue increased 1.2%, or $1.1 million, for the second quarter of fiscal 2011
compared to the same period of fiscal 2010.
Inpatient net revenue declined approximately 0.9%, while inpatient cases increased 0.4% in the
second quarter of fiscal 2011 compared to the same period of the prior year. Inpatient net patient
revenue was 69.7% and 70.8% of total net patient revenue for the fiscal quarter ending March 31,
2011 and March 31, 2010, respectively. Total cardiovascular related inpatient net revenue was
approximately 65% of total net inpatient revenue for the second fiscal quarter of 2011 versus
approximately 70% for the second fiscal quarter of fiscal 2010. The decline in cardiovascular
related net revenue as a percentage of total net inpatient revenue is a direct result of the net
revenue from Hualapai Mountain Medical Center (HMMC), our general acute care hospital which began
operations at the beginning of fiscal 2010.
Our outpatient net patient revenue increased approximately 4.8% during the second quarter of fiscal
2011 compared to the same period of the prior year. Our outpatient cases, excluding emergency
department visits, increased 30.3% during the second fiscal
quarter ending March 31, 2011 compared to the same period of the prior year. Our emergency
department visits increased 6.6% during the second quarter ending March 31, 2011 compared to the
same period of the prior year. Our outpatient net revenue benefited from a 58.9% increase in
outpatient cases at HMMC, which has seen an increase in cases since it began operations at the
beginning of fiscal 2010.
Net revenue for the second quarter of fiscal 2011 included charity care deductions of $2.4 million
compared to charity care deductions of $1.8 million for the second quarter of fiscal 2010. The
increase is the result of more uninsured patients applying and qualifying for charity care.
Personnel expense. Our consolidated personnel expense increased 2.1%, or $0.7 million, to $33.9
million, or 34.8% of net revenue, for the second quarter of fiscal 2011 from $33.2 million, or
34.3% of net revenue, for the second quarter of fiscal 2010.
The $0.7 million increase in personnel expense is due solely to a $0.7 million increase in medical
benefits expense due to an increase in employee medical claims. All other personnel related
expenses, including salaries and bonus expense, were flat year over year.
Medical supplies expense. Our consolidated medical supplies expense decreased 1.7%, or $0.4
million, to $23.2 million for the second quarter of fiscal 2011 from $23.6 million for the second
quarter of fiscal 2010.
The $0.4 million decrease in medical supplies expense is a result of a decline in cardiovascular
cases that use high dollar medical supplies and a reduction in sales tax expense on certain medical
supplies. We have been able to reduce our overall sales tax expense on medical supplies at certain
of our hospitals as a result of a sales tax review completed during the first fiscal quarter of
2011.
24
Table of Contents
Bad debt expense. Our consolidated bad debt expense increased 0.8%, or $0.1 million, to $10.0
million for the second quarter of fiscal 2011 from $9.9 million for the second quarter of fiscal
2010. As a percentage of net revenue, bad debt expense increased slightly to 10.4% for the second
quarter of fiscal 2011 as compared to 10.3% for the comparable period of fiscal 2010.
Our hospital division net accounts receivable primarily includes amounts due from patients and
third-party payors and amounts due for third-party payor settlements. Third-party payor
settlements include amounts due related to prior filed cost reports and estimated future cost
report filings. Our hospital division net accounts receivable due from patients and third-party
payors, excluding amounts due for the settlement of cost reports, was $47.2 million at March 31,
2011 and $46.1 million, at March 31, 2010. Our third-party net accounts payable for the settlement
of cost reports was $2.9 million and $1.8 million as of March 31, 2011 and 2010, respectively. Of
this amount, $1.8 million and $2.8 million was related to prior fiscal year cost reports as of
March 31, 2011 and 2010, respectively.
We compute our allowance for doubtful accounts based on a liquidation percentage by hospital. This
liquidation (or bad debt) percentage is based on a twelve month hindsight analysis computed on a
monthly basis while considering any current trends or changes in payor mix that could impact
historical collection percentages.
We reserve for the estimate of uncollectible self-pay accounts at the time the revenue is
recognized. As a result, an increase in self-pay admissions will increase the bad debt expense and
the allowance for doubtful accounts most significantly in the period in which the service is
rendered.
Our hospital division net patient accounts receivable outstanding by payor group excluding amounts
due from third-party payors for the settlement of cost reports as of March 31, 2011 and 2010 was as
follows:
Net Hospital Division Patient | ||||||||
Accounts Receivable Outstanding | ||||||||
(in thousands) | ||||||||
Payor Group | March 31, 2011 | March 31, 2010 | ||||||
Medicare |
$ | 17,862 | $ | 16,145 | ||||
Medicaid (1) |
3,647 | 3,520 | ||||||
Self-pay (2) |
5,586 | 4,962 | ||||||
Commercial & Other |
20,122 | 21,438 | ||||||
Total |
$ | 47,217 | $ | 46,065 | ||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. | |
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance (31.7% and 36.1% of total self-pay net accounts receivable outstanding at March 31, 2011 and 2010, respectively) and the self-pay portion due after insurance and government programs (68.3% and 63.9% of total self-pay net accounts receivable outstanding at March 31, 2011 and 2010, respectively). |
The below table reflects the percentage of hospital division net patient accounts receivable,
excluding amounts due for the settlement of cost reports, by aging group as of March 31, 2011:
Days Outstanding | ||||||||||||||||||||||||||||
As of March 31, 2011 | ||||||||||||||||||||||||||||
Payor Group | 0-30 | 31-60 | 61-120 | 121-150 | 151-180 | +181 | Total | |||||||||||||||||||||
Medicare |
53.8 | % | 29.1 | % | 27.2 | % | 7.7 | % | 12.7 | % | 4.8 | % | 37.8 | % | ||||||||||||||
Medicaid (1) |
5.3 | % | 8.6 | % | 12.2 | % | 19.9 | % | 13.2 | % | 8.5 | % | 7.7 | % | ||||||||||||||
Self-pay (2) |
1.2 | % | 5.7 | % | 14.6 | % | 22.7 | % | 33.4 | % | 54.2 | % | 11.8 | % | ||||||||||||||
Commercial & Other |
39.7 | % | 56.6 | % | 46.0 | % | 49.7 | % | 40.7 | % | 32.5 | % | 42.7 | % | ||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. | |
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance. |
25
Table of Contents
The below table reflects the percentage of hospital division net patient accounts receivable,
excluding amounts due for the settlement of cost reports, by aging group as of March 31, 2010:
Days Outstanding | ||||||||||||||||||||||||||||
As of March 31, 2010 | ||||||||||||||||||||||||||||
Payor Group | 0-30 | 31-60 | 61-120 | 121-150 | 151-180 | +181 | Total | |||||||||||||||||||||
Medicare |
54.7 | % | 17.8 | % | 17.3 | % | 5.7 | % | 3.8 | % | 2.7 | % | 35.6 | % | ||||||||||||||
Medicaid (1) |
4.1 | % | 12.6 | % | 12.5 | % | 11.3 | % | 7.6 | % | 10.2 | % | 7.5 | % | ||||||||||||||
Self-pay (2) |
2.8 | % | 8.6 | % | 13.4 | % | 19.2 | % | 17.2 | % | 53.6 | % | 10.8 | % | ||||||||||||||
Commercial & Other |
38.4 | % | 61.0 | % | 56.8 | % | 63.8 | % | 71.4 | % | 33.5 | % | 46.1 | % | ||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. | |
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance. |
For the quarter ended March 31, 2011, the hospital division provision for bad debts was 61.0% of
hospital net patient revenue, compared to 56.1% in the prior year. Our days sales outstanding for
our hospital division net accounts receivable, excluding amounts due from third-party payors
related to the settlement of cost reports, were 46 and 45 at March 31, 2011 and 2010, respectively.
Other operating expenses. Our consolidated other operating expenses increased 2.5%, or $0.5 million
to $22.8 million for the second quarter of fiscal 2011 from $22.3 million for the second quarter of
fiscal 2010.
Our total other operating expense increased $0.5 million for the second quarter of fiscal 2011
compared to fiscal 2010. The primary increases in operating expenses were increases in
professional fees related to our strategic options process, purchased contract services and
insurance expense, offset by reductions in net corporate and MedCath Partners personnel related
expenses.
Our hospital division purchased services expense increased approximately $0.6 million at certain of
our hospitals as we have entered into new arrangements with healthcare groups, such as
anesthesiologist and emergency department physicians, to ensure coverage at these hospitals. This
increase in expense is offset by the increase in our emergency department revenue for these
facilities. Our insurance expense increased $0.7 million due to an increase in our medical
malpractice claims paid and an increase in our coverage limit for directors and officers plan due
to our strategic options process.
Our total corporate and our MedCath Partners personnel related expenses; including salaries,
benefits, and training have declined approximately $2.6 million during the second quarter of fiscal
2011 compared to the same period of the prior year. This decline is the direct result of our
strategic options process as we continue to reduce headcount for our corporate office and our
MedCath Partners division as we sell our assets. This decline was offset by a $1.1 million
increase in bonus expense related to retention and annual performance bonuses and a $1.2 million
increase in outsourcing fees paid for our central business office and our information technology
services.
We incurred approximately $1.3 million in professional fees during the second quarter of fiscal
2011 related to our strategic options
process. These costs include legal, consulting and board fees. We began our strategic options
process in March of last year and incurred $0.2 million of strategic options expenses during the
second quarter of fiscal 2010. Our strategic options costs will continue to be material and we may
incur material costs related to contingencies that are currently unknown.
Depreciation expense. Depreciation expense decreased $1.5 million to $4.6 million for the second
quarter of fiscal 2011 from $6.1 million for the second quarter of fiscal 2010. The decrease in
depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due
to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.
Impairment expense. Impairment expense increased $4.8 million to $19.5 million for the second
quarter of fiscal 2011 from $14.7 million for the second quarter of fiscal 2010. During the second
quarter of fiscal 2011, the Company recognized an impairment of property and equipment at two of
its hospitals due to declines in operating performance as well as the uncertainty at those
hospitals as a result of the Companys strategic options process. During the second quarter of
fiscal 2010, the Company recognized an impairment of property and equipment at one of its hospitals
due to declines in operating performance as well as the ongoing review of strategic alternatives
for the Company.
Interest expense. Interest expense decreased $0.1 million to $1.0 million for the second quarter of
fiscal 2011 from $1.1 million for the second quarter of fiscal 2010. The decrease in interest
expense is principally due to the reduction in amounts outstanding under the Companys Senior
Secured Credit Facility, partially offset by an increase in the amount of assets under capital
leases. On May 9, 2011, the Company repaid the entire balance
outstanding under the Companys Senior Secured Credit Facility.
Gain on sale of equity interests. The gain on sale of equity interests of $0.2 million for the
second quarter of fiscal 2011 is related to the sale of our interest in Central New Jersey Heart
Services, LLC on January 1, 2011.
26
Table of Contents
Loss on note receivable. Our corporate and other division entered into a note receivable agreement
with a third party during 2008. Certain minority membership interest of one of our hospitals was
pledged as collateral to secure the note receivable on behalf of the third party. An impairment of
the long-lived assets of the hospital in which the minority membership interest was pledged as
collateral for the note receivable was recorded during the second quarter of fiscal 2010 due to
sustained losses and insufficient forecasted cash flow. The note receivable was deemed
uncollectable and a loss of $1.5 million was recorded in the second quarter of fiscal 2010 due to
our determination of the third partys inability to service the note and the insufficiency of the
value of the collateral securing the note.
Equity in net earnings of unconsolidated affiliates. The net earnings of unconsolidated affiliates
are comprised of our share of earnings in unconsolidated hospitals, a hospital realty investment
and several ventures within our MedCath Partners Division. The Company owned two unconsolidated
hospitals until the disposition of its interest in Avera Heart Hospital of South Dakota (AHHSD)
on October 1, 2010.
Equity in net earnings of unconsolidated affiliates decreased during the second quarter of fiscal
2011 to $1.3 million from $3.1 million for the same period of fiscal 2010. AHHSD and Southwest
Arizona Heart and Vascular Center, LLC contributed $1.1 million and $1.0 million, respectively, of
net earnings during the second quarter of fiscal 2010 and were disposed on October 1, 2010 and
November 1, 2010, respectively, resulting in the noted decrease in such equity in net earnings.
The Company expects continued decreases due to the disposition of its interest in Central New
Jersey Heart Services, LLC on January 1, 2011.
Income tax benefit. Income tax benefit was $(7.7) million for the second quarter of fiscal 2011
compared to $(5.6) million for the second quarter of fiscal 2010, which represents an effective tax
rate of (46.4%) and (45.5%) for the respective periods. The second quarter fiscal 2011 and 2010
effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income
allocable to our noncontrolling interests.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes
decreased $0.4 million, net of taxes for the second quarter of fiscal 2011 from a loss of $1.9
million, net of taxes, for the comparable period of fiscal 2010. During the second quarter of
fiscal 2010, the Company recognized an impairment of $5.2 million to property and equipment at one
of its discontinued hospitals due to declines in operating performance as well as the receipt of a
third party market offer that indicated impairment existed. Such impairment was partially offset by
the operating activities of another of the Companys discontinued hospitals. During the second
quarter of fiscal 2011, the Company has had nominal operating activities related to its
discontinued operations.
Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of
consolidated subsidiaries increased to $3.2 million for the second quarter of fiscal 2011 from $2.5
million for the comparable period of fiscal 2010.
We recognize a disproportionate share of losses for certain of our entities. The increase in net
income attributable to noncontrolling interest is the result of us absorbing more losses during the
current period compared to the prior year. We expect earnings attributable to noncontrolling
interests to fluctuate in future periods as we either recognize disproportionate losses and/or
recoveries thereof through disproportionate profit recognition. For a more complete discussion of
our accounting for noncontrolling interests, including the basis for disproportionate allocation
accounting, see Critical Accounting Policies in our Annual Report on Form 10-K for the fiscal year
ended September 30, 2010.
27
Table of Contents
Results of Operations
Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010
Statement of Operations Data. The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
Six Months Ended March 31, | ||||||||||||||||||||
(in thousands except percentages) | ||||||||||||||||||||
Increase/ | ||||||||||||||||||||
(Decrease) | % of Net Revenue | |||||||||||||||||||
2011 | 2010 | % | 2011 | 2010 | ||||||||||||||||
Net revenue |
$ | 186,063 | $ | 184,607 | 0.8 | % | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel expense |
66,313 | 64,786 | 2.4 | % | 35.6 | % | 35.1 | % | ||||||||||||
Medical supplies expense |
42,411 | 45,688 | (7.2 | )% | 22.8 | % | 24.7 | % | ||||||||||||
Bad debt expense |
19,715 | 17,437 | 13.1 | % | 10.6 | % | 9.4 | % | ||||||||||||
Other operating expenses |
46,959 | 44,640 | 5.2 | % | 25.3 | % | 24.2 | % | ||||||||||||
Pre-opening expenses |
| 866 | (100.0 | )% | | 0.5 | % | |||||||||||||
Depreciation |
9,517 | 12,064 | (21.1 | )% | 5.1 | % | 6.5 | % | ||||||||||||
Impairment of long-lived assets |
19,548 | 14,700 | 100.0 | % | 10.5 | % | 8.0 | % | ||||||||||||
Loss on disposal of property, equipment and other assets |
271 | 27 | 903.7 | % | 0.1 | % | 0.0 | % | ||||||||||||
Loss from operations |
(18,671 | ) | (15,601 | ) | 19.7 | % | (10.0 | )% | (8.6 | )% | ||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest expense |
(2,079 | ) | (1,999 | ) | (4.0 | )% | (1.0 | )% | (1.1 | )% | ||||||||||
Interest and other income |
539 | 85 | 534.1 | % | 0.3 | % | 0.0 | % | ||||||||||||
Gain on sale of unconsolidated affiliates |
15,570 | | N/M | 8.4 | % | | ||||||||||||||
Loss on note receiveable |
| (1,507 | ) | (100.0 | )% | | (0.8 | )% | ||||||||||||
Equity in net earnings of unconsolidated affiliates |
1,860 | 4,608 | (59.6 | )% | 1.0 | % | 2.4 | % | ||||||||||||
Loss from continuing operations before income taxes |
(2,781 | ) | (14,414 | ) | (80.7 | )% | (1.5 | )% | (7.9 | )% | ||||||||||
Income tax benefit |
(3,213 | ) | (6,976 | ) | (53.9 | )% | (1.7 | )% | (3.8 | )% | ||||||||||
Income (loss) from continuing operations |
432 | (7,438 | ) | (105.8 | )% | 0.2 | % | (4.0 | )% | |||||||||||
Income (loss) from discontinued operations, net of taxes |
37,727 | (3,064 | ) | (1331.3 | )% | 20.2 | % | (1.7 | )% | |||||||||||
Net income (loss) |
38,159 | (10,502 | ) | (463.3 | )% | 20.5 | % | (5.7 | )% | |||||||||||
Less: Net income attributable to noncontrolling interest |
(14,615 | ) | (3,364 | ) | 334.5 | % | (7.9 | )% | (1.8 | )% | ||||||||||
Net income (loss) attributable to MedCath Corporation |
$ | 23,544 | $ | (13,866 | ) | (269.8 | )% | 12.7 | % | (7.5 | )% | |||||||||
Six Months Ended March 31, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
Selected Operating Data (a): |
||||||||||||
Number of hospitals |
5 | 5 | ||||||||||
Licensed beds (b) |
421 | 421 | ||||||||||
Staffed and available beds (c) |
380 | 380 | ||||||||||
Admissions (d) |
9,343 | 9,404 | (0.6 | )% | ||||||||
Adjusted admissions (e) |
14,074 | 13,745 | 2.4 | % | ||||||||
Patient days (f) |
35,085 | 35,362 | (0.8 | )% | ||||||||
Adjusted patient days (g) |
53,194 | 51,905 | 2.5 | % | ||||||||
Average length of stay (days) (h) |
3.76 | 3.76 | (2.1 | )% | ||||||||
Occupancy (i) |
50.7 | % | 51.1 | % | ||||||||
Inpatients with a catheterization procedure (j) |
3,732 | 3,888 | (4.0 | )% | ||||||||
Inpatient surgical procedures (k) |
2,219 | 2,259 | (1.8 | )% | ||||||||
Hospital net revenue (in thousands except percentages) |
$ | 181,614 | $ | 178,263 | 1.9 | % |
28
Table of Contents
(a) | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements. | |
(b) | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use. | |
(c) | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. | |
(d) | Admissions represent the number of patients admitted for inpatient treatment. | |
(e) | Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. | |
(f) | Patient days represent the total number of days of care provided to inpatients. | |
(g) | Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. | |
(h) | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. | |
(i) | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds. | |
(j) | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals catheterization labs during the period. | |
(k) | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
Net Revenue. Our consolidated net revenue increased 0.8%, or $1.5 million, to $186.1 million for
the six months ended March 31, 2011 from $184.6 million for the six months ended March 31, 2010.
Hospital Division net revenue increased 1.9%, or $3.4 million, for the first six months of fiscal
2011 compared to the same period of fiscal 2010.
Inpatient net revenue was 69.5% of the Hospital Divisions net patient revenue for the first six
months of fiscal 2011 compared to approximately 71.2% for the same period of the prior year. Our
total inpatient cases were down 0.8% and inpatient net revenue was flat for the first six months of
fiscal 2011 compared to the first six months of fiscal 2010. Outpatient net revenue increased 8.2%
due to HMMC, our newest hospital which began operations during the first quarter of fiscal.
Net revenue for the first six months of fiscal 2011 included charity care deductions of $4.5
million compared to charity care
deductions of $3.8 million for the first six months of fiscal 2010. The $0.7 million increase is
the result of more uninsured patients applying and qualifying for charity care.
Personnel expense. Our consolidated personnel expense increased 2.4%, or $1.5 million, to $66.3
million for the six months ended March 31, 2011 from $64.8 million for the six months ended March
31, 2010.
The increase in personnel expense was primarily due to a $1.0 million increase in stock based
compensation. As part of the strategic options process and the impact that certain related events
may have on non-deductibility of executive compensation, the compensation committee of our Board of
Directors waived the performance vesting criteria for certain executive managements restricted
stock shares during the first quarter of fiscal 2011 to ensure the deductibility of the
compensation expense for federal corporate income tax purposes. The waiver caused all future stock
based compensation related to the shares that would have vested over time as performance criteria
were met was recognized during the first quarter of fiscal 2011. The shares subject to the waiver
of vesting criteria continue to maintain sell restrictions that will be lifted upon a change in
control of the Company. In addition, management updated the estimate on the restricted share
forfeiture rate since it is anticipated that the rate of employee turnover will decline as we
continue to progress with our strategic options process. We also experienced a $0.9 million
increase in expense related to hospital employee healthcare claims. This expense is directly
attributed to the number of claims reported during the period. These increases were offset by a
decline in salaries and wages and related benefits as we continue to monitor costs to better align
these costs with net revenues and as the result of a reduction in management positions within
hospital division as we sell our hospital assets.
Medical supplies expense. Our consolidated medical supplies expense decreased 7.2%, or $3.3
million, to $42.4 million for the first six months of fiscal 2011 from $45.7 million for the first
six months of fiscal 2010.
The decline in medical supplies expense is primarily due to $2.9 million in sales tax refunds at
two of our hospitals. Absent the refunds, medical supplies expense decreased $0.4 million year
over year due to a decline in procedures being performed that have higher supply costs, such as
open heart and ICD procedures, during the first six months of fiscal 2011 compared to the same
period of the prior year.
29
Table of Contents
Bad debt expense. Our consolidated bad debt expense increased 13.1% to $19.7 million for the first
six months of fiscal 2011 from $17.4 million for the first six months of fiscal 2010. As a
percentage of net revenue, bad debt expense increased to 10.6% for the first six months of fiscal
2011 as compared to 9.4% for the comparable period of fiscal 2010. This increase is attributable to
a $5.2 million increase in self-pay revenue for the first six months of fiscal 2011 compared to the
same period of the prior year offset by improved collection on accounts receivable during fiscal
2011. Our days sales outstanding for the first six months of fiscal 2011 and fiscal 2010 were 48.
Other operating expenses. Our consolidated other operating expenses increased 5.2%, or $2.4
million, to $47.0 million for the first six months of fiscal 2011 from $44.6 million for the first
six months of fiscal 2010.
Our corporate and MedCath Partners divisions have experienced a $2.9 million reduction in personnel
expenses for salaries, benefits and training. However, this reduction was offset by a $1.3 million
increase in bonus expense related to retention programs associated with our strategic options
process and the expected attainment of performance goals, and a $1.5 million increase in costs
incurred to outsource our central business office and information technology services.
Our legal and professional fees were $2.6 million higher for the first six months of fiscal 2010
compared to the first six months of fiscal 2009 due to the fees incurred related to our strategic
options process. These costs include legal, consulting and board related fees. Our strategic
options costs will continue to be material and we may incur material costs related to contingencies
that are currently unknown.
Depreciation expense. Depreciation expense decreased $2.6 million to $9.5 million for the first six
months of fiscal 2011 from $12.1 million for the first six months of fiscal 2010. The decrease in
depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due
to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.
Impairment expense. Impairment expense increased $4.8 million to $19.5 million for the first six
months of fiscal 2011 from $14.7 million for the first six months of fiscal 2010. During the
second quarter of fiscal 2011, the Company recognized an impairment of property and equipment at
two of its hospitals due to declines in operating performance as well as the uncertainty at those
hospitals as a result of the Companys strategic options process. During the second quarter of
fiscal 2010, the Company recognized an impairment of property and equipment at one of its hospitals
due to declines in operating performance as well as the ongoing review of strategic alternatives
for the Company.
Interest expense. Interest expense increased $0.1 million or 4.0% to $2.1 million for the first six
months of fiscal 2011 from $2.0 million for the first six months of fiscal 2010. The increase in
interest expense is primarily attributable to the overall reduction in our outstanding debt and
interest rates on our outstanding debt. The increase in interest expense is attributable to a
slight increase in the rate charged on outstanding debt and an increase in the amount of assets
under capital leases. Such increases were partially offset by a reduction in amounts outstanding
under the Companys Senior Secured Credit Facility. On
May 9, 2011, the Company repaid the entire balance outstanding
under the Companys Senior Secured Credit Facility.
Gain on sale of equity interests. The gain on sale of equity interests of $15.6 million for the
first six months of fiscal 2011 is related to the sale of our interest in Central New Jersey Heart
Services, LLC, AHHSD partially offset by a nominal loss on the sale of the
Companys interest in Southwest Arizona Heart and Vascular Center, LLC. Such sales occurred on
January 1, 2011, October 1, 2010 and November 1, 2010, respectively.
Loss on note receivable. Our corporate and other division entered into a note receivable agreement
with a third party during 2008. Certain minority membership interest of one of our hospitals was
pledged as collateral to secure the note receivable on behalf of the third party. An impairment of
the long-lived assets of the hospital in which the minority membership interest was pledged as
collateral for the note receivable was recorded during the second quarter of fiscal 2010 due to
sustained losses and insufficient forecasted cash flow. The note receivable was deemed
uncollectable and a loss of $1.5 million was recorded in the first six months of fiscal 2010 due to
our determination of the third partys inability to service the note and the insufficiency of the
value of the collateral securing the note.
Equity in net earnings of unconsolidated affiliates. The net earnings of unconsolidated affiliates
are comprised of our share of earnings in unconsolidated hospitals, a hospital realty investment
and several ventures within our MedCath Partners Division. The Company owned two unconsolidated
hospitals until the disposition of its interest in AHHSD on October 1, 2010.
Equity in net earnings of unconsolidated affiliates decreased during the first six months of fiscal
2011 to $1.9 million from $4.6 million for the same period of fiscal 2010. AHHSD and Southwest
Arizona Heart and Vascular Center, LLC contributed $2.1 million and $1.3 million, respectively, of
net earnings during the first six months of fiscal 2010 and were disposed on October 1, 2010 and
November 1, 2010, respectively, resulting in the noted decrease in such equity in net earnings.
The Company expects continued decreases due to the disposition of its interest in Central New
Jersey Heart Services LLC on January 1, 2011.
30
Table of Contents
Income tax benefit. Income tax benefit was $(3.2) million for the first six months of fiscal 2011
compared to $(7.0) million for the first six months of fiscal 2010, which represents an effective
tax rate of (115.5%) and (48.4%) for the respective periods. The first six months of fiscal 2011
and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of
income allocable to our noncontrolling interests.
Income (loss) from discontinued operations, net of taxes. Income (loss) from discontinued
operations, net of taxes increased to an income of $37.7 million, net of taxes for the first six
months of fiscal 2011 from a loss of $(3.1) million, net of taxes, for the comparable period of
fiscal 2010. During the first six months of fiscal 2011, the Company recognized pre-tax gains upon
disposition of assets of discontinued operations of $69.9 million, partially offset by an $11.1
million loss on early termination of debt at one of the facilities. The significant components of
the gains recognized are a $35.7 million gain and a $34.3 million gain on the sale of the assets of
HHA and TexSan Heart Hospital, respectively. During the first six months of fiscal 2010, the
Company recognized an impairment of $5.2 million to property and equipment at one of its
discontinued hospitals due to declines in operating performance as well as the receipt of an
independent third party market offer that indicated that impairment existed. Such impairment was
partially offset by the operating activities of another of the Companys discontinued hospitals.
During the first six months of fiscal 2011, the Company has had nominal operating activities
related to its discontinued operations.
Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of
consolidated subsidiaries increased to $14.6 million for the first six months of fiscal 2010 from
$3.4 million for the comparable period of fiscal 2010.
Net income attributable to noncontrolling interest increased $7.1 million and $2.2 million due to
the noncontrolling shareholders interest in the gains recognized in fiscal 2011 upon the
disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In
addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH
in the first six months of fiscal 2010 and the Companys sale of its interest in AzHH on October 1,
2010.
We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we
either recognize disproportionate losses and/or recoveries thereof through disproportionate profit
recognition. For a more complete discussion of our accounting for noncontrolling interests,
including the basis for disproportionate allocation accounting, see Critical Accounting Policies
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Liquidity and Capital Resources
Cash used in continuing operations from operating activities was $5.5 million for the first six
months of fiscal 2011 compared to cash provided by continuing operations operating activities of
$11.7 million for the comparable period of fiscal 2010. The decrease of $17.2 million in cash
provided by continuing operations from operating activities was due to an overall $6.4 million
decrease in cash generated from continuing. Cash from continuing operations was further decreased
by an increase in payments of $9.7 million related to the timing of payments associated with
accounts payable, a decrease in accounts receivable collections of $2.3 million and a $0.5
million increase in cash payments related to the timing of prepaid obligations, such as yearly
insurance premiums. These increases in cash payments were offset by a $1.6 million reduction in
cash payments associated with the purchases of and cost of medical supplies.
Our investing activities from continuing operations provided net cash of $32.1 million for the
first six months of fiscal 2011 compared to a use of cash of $13.1 million for the comparable
period of fiscal 2010. Such increase was primarily due to the net proceeds of $32.5 million for
the disposition of the Companys interest in Central New Jersey Heart Services, LLC, AHHSD and
Southwest Arizona Heart and Vascular LLC during the first six months of fiscal 2011. In addition,
the Company experienced a decrease of $12.8 million in cash paid for property and equipment in the
first six months of fiscal 2011 compared to the same period in fiscal 2010. This decrease is
primarily related to the capital expenditures in fiscal 2010 related to the development of HMMC,
which opened in October 2009.
Our financing activities from continuing operations used net cash of $45.3 million for the first
six months of fiscal 2011 compared to $16.7 million for the comparable period of fiscal 2010. The
increase was due to the payments on our Amended Credit Facility during the first six months of
fiscal 2011, including $26.8 million of prepayments during the second quarter of fiscal 2011.
Capital Expenditures. Cash paid for property and equipment was $0.8 million and $13.6 million for
the first six months of fiscal years 2011 and 2010, respectively. Of the $13.6 million of cash paid
for property and equipment during the first six months of fiscal 2010, $7.5 million related to
HMMC, which opened in October 2009.
Obligations and Availability of Financing. At March 31, 2011, we had $38.0 million of outstanding
long-term debt and obligations under capital leases, of which $32.8 million was classified as
current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $30.2
million. The remaining outstanding obligation under capital leases of $7.8 million was due to
various lenders to our hospitals. No amounts were outstanding under our Revolver. The maximum
availability under our Revolver was $25.9 million, less the amount of outstanding letters of credit
totaling $1.7 million, as of March 31, 2011. On May 9,
2011, the Company repaid the entire balance outstanding under the
Amended Credit Facility and terminated the facility on that date.
Covenants related to our long-term debt restrict the payment of dividends and require the
maintenance of specific financial ratios and amounts and periodic financial reporting. At March 31,
2011 and September 30, 2010, the Company was in compliance with its debt covenants.
31
Table of Contents
At March 31, 2011, we guaranteed either all or a portion of the obligations of certain of our
subsidiary hospitals for equipment and other notes payable. We provide these guarantees in
accordance with the related hospital operating agreements, and we receive a fee for providing these
guarantees from either the hospitals or the physician investors.
We believe
that cash flows from our recent asset sales and our cash on hand from
operations will be sufficient
to finance our strategic plans, capital expenditures and our working capital requirements for the
next 12 to 18 months.
Intercompany Financing Arrangements. We provide secured real estate, equipment and working capital
financings to our majority-owned hospitals. Each intercompany real estate loan is separately
documented and secured with a lien on the borrowing hospitals real estate, building and equipment
and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and
accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar
to terms commercially available.
Each intercompany equipment loan is separately documented and secured with a lien on the borrowing
hospitals equipment and certain other assets. Amounts borrowed under the intercompany equipment
loans are payable in monthly installments of principal and interest over terms that range from 5 to
7 years. The intercompany equipment loans accrue interest at rates ranging from 5.8% to 8.43%. The
weighted average interest rate for the intercompany equipment loans at March 31, 2011 was 7.30%.
We typically receive a fee from the minority partners in the subsidiary hospitals as further
consideration for providing these intercompany real estate and equipment loans.
We also use intercompany financing arrangements to provide cash support to individual hospitals for
their working capital and other corporate needs. We provide these working capital loans pursuant to
the terms of the operating agreements between our physician and hospital investor partners and us
at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish
borrowing limits and provide for a market rate of interest to be paid to us on outstanding
balances. These intercompany loans are subordinate to each hospitals mortgage and equipment debt
outstanding, but are senior to our equity interests and our partners equity interests in the
hospital venture and are secured, subject to the prior rights of the senior lenders, in each
instance by a pledge of certain of the borrowing hospitals assets. Also as part of our
intercompany financing and cash management structure, we sweep cash from individual hospitals as
amounts are available in excess of the individual hospitals working capital needs. These funds are
advanced pursuant to cash management agreements with the individual hospital that establish the
terms of the advances and provide for a rate of interest to be paid consistent with the market rate
earned by us on the investment of its funds. These cash advances are due back to the individual
hospital on demand and are subordinate to our equity investment in the hospital venture.
The estimated net realizable value of intercompany notes outstanding with the Companys
subsidiaries in continuing operations was $123.0 million and $153.2 million as of March 31, 2011
and September 30, 2010, respectively.
The net realizable value of our intercompany notes outstanding includes a reserve for the amount of
the impairment charges we have recorded for facilities that have an intercompany amount outstanding
that exceeds the carrying value of the related assets that serve as collateral on the notes.
Therefore, our total net realizable value of our intercompany note outstanding has been reduced by
$82.6 million, the total amount of impairment charge recorded for assets in continuing operations.
32
Table of Contents
The estimated net realizable value of intercompany notes related to continuing operations at March
31, 2011 is outlined below:
Estimated Net Realizable Value of Intercompany Notes Related to Continuing
Operations at March 31, 2011
Operations at March 31, 2011
(in thousands) | ||||
Heart Hospital of New Mexico and Arkansas Heart Hospital (1) |
$ | 46,200 | ||
Bakersfield Heart Hospital |
32,144 | |||
Hualapai Mountain Medical Center (2) |
22,000 | |||
Louisiana Medical Center and Heart Hospital (2) |
22,700 | |||
Continuing Operations |
$ | 123,044 | ||
(1) | Heart Hospital of New Mexico and Arkansas Heart Hospital were included in continuing operations at March 31, 2011. However, the Company entered into agreements in May 2011 to dispose of its interests in these entities, subject to shareholder approval. See Note 15. | |
(2) | The net realizable value of these intercompany notes is directly related to the fair value (and carrying value) of the property, plant and equipment of these entities which serve as collateral for the notes. The carrying value of the property, plant and equipment is net of impairment charges that were incurred related to these assets. |
Retained Obligations Subsequent to Disposition. Included in discontinued operations are
certain liabilities that the Company has retained upon the disposition of the related entity. As
the Companys hospitals are organized as partnerships, upon disposition of the related operations,
assets and certain liabilities, the partnerships are responsible for the resolution of outstanding
payables, remaining obligations, including those related to cost reports, medical malpractice and
other obligations and wind down of the respective tax filings of the partnership. The partnerships
are also responsible for any unknown liabilities that may arise. The Company has reported all
known obligations in its consolidated balance sheets as of March 31, 2011 and September 30, 2010.
However, as the ultimate resolution of the outstanding payables and obligations may take in excess
of one year, our estimates may prove incorrect and result in the Company paying amounts in excess
of those recorded at the respective balance sheet date.
Retained Cash Balance. At March 31, 2011, the Company had $119.7 million in cash related to
continuing operations and $42.3 million in cash related to discontinued operations. As of March
31, 2011, the Companys estimate of total potential cash distributions to the Company from
discontinued operations is $25.0 million after taking into account distributions to minority
owners, the liquidation of all assets and the settlement of all known liabilities, but does not
take into account any unknown contingent liabilities
related to the discontinued operations. The estimate of total cash distributions to the Company
may change as it updates its estimates. There can be no assurance when the distributions to the
Company from discontinued operations may take place, but it may be over an extended period of time.
Any cash retained will be used to settle outstanding debt, which is due in full in November, 2011.
Disclosure About Critical Accounting Policies
Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2010. During the first six months of fiscal 2011 we adopted a new accounting policy
as discussed in Note 2 Recent Accounting Pronouncements to our consolidated financial
statements. The adoption of this new accounting policy did not have a material impact on our
consolidated financial statements.
Forward-Looking Statements
Some of the statements and matters discussed in this report and in exhibits to this report
constitute forward-looking statements, including those relating to estimated distributions to the
Company, resolution of outstanding payables and obligations, amongst others. 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. 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 its exhibits
might not occur. Our forward-looking statements speak only as of the date of this report or the
date they were otherwise made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. We
urge you to review carefully all of the information in this report and our other filings with the
SEC, including the discussion of risk factors in Item 1A. Risk Factors in this report and our
Annual Report on Form 10-K for the year ended September 30, 2010, before making an investment
decision with respect to our equity securities. A copy of this report, including exhibits, is
available on the internet site of the SEC at http://www.sec.gov or through our website at
http://www.medcath.com.
33
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We maintain a policy for managing risk related to exposure to variability in interest rates,
commodity prices, and other relevant market rates and prices which includes considering entering
into derivative instruments (freestanding derivatives), or contracts or instruments containing
features or terms that behave in a manner similar to derivative instruments (embedded derivatives)
in order to mitigate our risks. In addition, we may be required to hedge some or all of our market
risk exposure, especially to interest rates, by creditors who provide debt funding to us. The
Company disposed of its minority interest in a hospital that maintained a cash flow hedge on
October 1, 2010. As a result, the Company does not have outstanding any derivatives at March 31,
2011. There was no material change in our policy for managing risk related to variability in
interest rates, commodity prices, other relevant market rates and prices during the first six
months of fiscal 2011. See Item 7A in the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2010 for further discussions about market risk.
Interest Rate Risk
Our Amended Credit Facility borrowings expose us to risks caused by fluctuations in the underlying
interest rates. The total outstanding balance of our Credit Facility was $30.2 million at March 31,
2011. A change of 100 basis points in the underlying interest rate would have caused a change in
interest expense of approximately $0.2 million during the six month period ended March 31, 2011.
Item 4. Controls and Procedures
The President and Chief Executive Officer and the Executive Vice President and Chief Financial
Officer of the Company (its principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation of the Companys disclosure controls and
procedures as of March 31, 2011, that the Companys disclosure controls and procedures were
effective as of March 31, 2011 to ensure that information required to be disclosed by the Company
in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized and reported in a timely manner, and includes
controls and procedures designed to ensure that information required to be disclosed by the Company
in the reports that it files under the Exchange Act is accumulated and communicated to the
Companys management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. There were no changes during
the fiscal quarter to the Companys internal controls over financial reporting that materially
affected or is reasonably likely to materially affect, the Companys internal controls over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are occasionally involved in legal proceedings and other claims arising out of our
operations in the normal course of business. See Note 7 Contingencies and Commitments to the
consolidated financial statements included in this report.
Item 1A. Risk Factors
Information concerning certain risks and uncertainties appears under the heading Forward-Looking
Statements in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K
for the year ended September 30, 2010. You should carefully consider these risks and uncertainties
before making an investment decision with respect to our securities. Such risks and uncertainties
could materially adversely affect our business, financial condition or operating results.
During the period covered by this report, there have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2010 or
filings subsequently made with the Securities and Exchange Commission.
Item 6. Exhibits
Exhibit No. | Description | |
31.1
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
34
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDCATH CORPORATION |
||||
Dated: May 10, 2011 | By: | /s/ O. EDWIN FRENCH | ||
O. Edwin French | ||||
President and Chief Executive Officer (principal executive officer) |
||||
By: | /s/ JAMES A. PARKER | |||
James A. Parker | ||||
Executive Vice President and Chief Financial Officer (principal financial officer) |
||||
By: | /s/ LORA RAMSEY | |||
Lora Ramsey | ||||
Vice President and Controller (principal accounting officer) |
35
Table of Contents
INDEX TO EXHIBITS
Exhibit No. | Description | |
31.1
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
36