UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended September 30,
2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number
000-33009
MedCath Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction of
incorporation or organization)
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56-2248952
(I.R.S. Employer
Identification No.)
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10720 Sikes Place
Charlotte, North Carolina 28277
(Address of principal executive
offices, including zip code)
(704) 815-7700
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of
1934. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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 December 10, 2010 there were 20,469,305 shares
of the Registrants Common Stock outstanding. The aggregate
market value of the Registrants common stock held by
non-affiliates as of March 31, 2010 was approximately
$206.0 million (computed by reference to the closing sales
price of such stock on the Nasdaq Global
Market®
on such date).
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants proxy statement for its annual
meeting of stockholders to be held in 2011 are incorporated by
reference into Part III of this Report.
MEDCATH
CORPORATION
FORM 10-K
TABLE OF
CONTENTS
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FORWARD-LOOKING
STATEMENTS
Some of the statements and matters discussed in this report and
in exhibits to this report constitute forward-looking
statements. Words such as expects,
anticipates, approximates,
believes, estimates, intends
and hopes and variations of such words and similar
expressions are intended to identify such forward-looking
statements. We have based these statements on our current
expectations and projections about future events. These
forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those
projected in these statements. The forward-looking statements
contained in this report include, among others, statements about
the following:
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our examination of strategic alternatives,
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the impact of federal and state healthcare reform initiatives,
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changes in Medicare and Medicaid reimbursement levels,
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the impact of governmental entity audits,
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unanticipated delays in achieving expected operating results at
our newer and expanded hospitals,
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difficulties in executing our strategy,
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our ability to consummate asset sales and other transactions,
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our relationships with physicians who use our facilities,
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competition from other healthcare providers,
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our ability to attract and retain nurses and other qualified
personnel to provide quality services to patients in our
facilities,
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our information systems,
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existing governmental regulations and changes in, or failure to
comply with, governmental regulations,
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liabilities and other claims asserted against us,
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changes in medical devices or other technologies, and
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market-specific or general economic downturns.
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Although these statements are made in good faith based upon
assumptions our management believes are reasonable on the date
they are made, 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 the
discussion of risk factors before making an investment decision
with respect to our debt and equity securities.
Unless otherwise noted, the following references in this report
will have the meanings below:
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the terms the Company, MedCath,
we, us and our refer to
MedCath Corporation and its consolidated subsidiaries; and
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references to fiscal years are to our fiscal years ending
September 30. For example, fiscal 2010 refers
to our fiscal year ended September 30, 2010.
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ii
PART I
Overview
We were incorporated as MedCath Corporation in Delaware in 2001.
We are a healthcare provider and are 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. We opened our
first hospital in 1996 and as of September 30, 2010, had
ownership interests in and operated ten hospitals, including
eight in which we owned a majority interest. 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.
As noted below under Our Strategic Options Review
on March 1, 2010, we announced our intention to sell
the Company, our individual assets or a combination thereof.
Since this announcement, we have sold two of our majority owned
hospitals that were classified as discontinued operations as of
September 30, 2010, our equity interest in one of our
minority owned hospitals, and a minority venture owned by our
MedCath Partners division. As a result, we currently own
interests in seven hospitals, including six in which we own a
majority interest. In addition, we have an agreement to sell one
of the seven remaining hospitals.
The hospitals in which we had an ownership interest as of
September 30, 2010 had a total of 825 licensed beds, 117 of
which are related to Arizona Heart Hospital (AzHH)
and Heart Hospital of Austin (HHA) whose assets,
liabilities, and operations are included within discontinued
operations. AzHH and HHA were sold on October 1, 2010 and
November 1, 2010, respectively. Our seven hospitals that
currently comprise our continuing operations have 653 licensed
beds and are located in six states: Arizona, Arkansas,
California, Louisiana, New Mexico, and Texas.
In addition to our hospitals, we currently own
and/or
manage eight cardiac diagnostic and therapeutic facilities.
Seven of these facilities are 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.
We refer to our diagnostics division as MedCath
Partners. For financial data and other information of this
and other segments of our business see Note 20 to our
audited consolidated financial statements in this report on
Form 10-K
for financial information by segment.
We are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the Exchange
Act) and therefore, we file reports, proxy statements and
other information with the Securities and Exchange Commission
(SEC). The reports, statements and other information
we submit to the SEC may be read and copied at the Public
Reference Room of the SEC at 100 F Street NE,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
(800) SEC-0330. In addition, the SEC maintains a website at
www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers, like us,
that file electronically.
We maintain a website at www.medcath.com that investors
and interested parties can access and obtain copies,
free-of-charge,
our proxy statements, annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
Investors and interested parties can also submit electronic
requests for information directly to the Company at the
following
e-mail
address: ir@medcath.com. Alternatively,
communications can be mailed to the attention of Investor
Relations at our executive offices.
Information on our website is not incorporated into this
Form 10-K
or our other securities filings and is not a part of this or
them.
1
Our
Strategic Options Review
On March 1, 2010, we announced that our Board of Directors
had formed a Strategic Options Committee to consider the sale
either of our equity 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:
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The disposition of Arizona Heart Hospital (Phoenix, Arizona) in
which we 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. We anticipate that we will receive final
net proceeds of approximately $31.5 million from the
transaction after payment of retained known liabilities, payment
of taxes related to the transaction and collection of the
hospitals accounts receivable. The $31.5 million in
estimated net proceeds is prior to any reserves, if any,
required in managements judgment to address any potential
contingent liabilities.
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The disposition of our wholly owned subsidiary that held 33.3%
ownership of Avera Heart Hospital of South Dakota located in
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. We estimate that
we will receive final net proceeds from the transaction of
approximately $16.0 million, after closing costs and
payment of estimated taxes related to the transaction and prior
to reserves, if any, required in managements judgment to
address any potential contingent liabilities.
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The disposition of Heart Hospital of Austin (Texas) in which we
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. We anticipate that we will
receive final net proceeds of approximately $24.1 million
from the transaction after repayment of third party debt and a
related prepayment fee, payment of all known retained
liabilities of the partnership, payment of taxes related to the
transaction, collection of the partnerships accounts receivable,
and distributions to the hospitals minority partners. The
$24.1 million in estimated net proceeds is prior to
reserves, if any, required in managements judgment to
address any potential contingent liabilities.
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The disposition of our 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.
We estimate that final net proceeds from the transaction will
total approximately $6.9 million, after closing costs and
income tax benefit related to a tax loss on the transaction, but
prior to reserves, if any, required in managements
judgment to address any potential contingent liabilities.
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In addition, we announced on November 8, 2010, that we,
along with our physician investors, had entered into a
definitive agreement to sell substantially all the assets of
TexSan Heart Hospital (San Antonio, Texas) to
Methodist Healthcare System of San Antonio for
$76.25 million, plus retained working capital. The
transaction, which is subject to regulatory approval and other
customary closing conditions, is anticipated to close during our
second quarter of fiscal 2011, which ends March 31, 2011.
We anticipate that we will receive approximately
$58.0 million from the transaction after payment of all
retained known liabilities of the partnership, payment of taxes
related to the transaction, collection of the partnerships
accounts receivable, and distributions to the hospitals
minority partners. The $58.0 million in estimated net
proceeds is prior to reserves, if any, required in
managements judgment to address any potential contingent
liabilities.
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 our equity, a sale of our
remaining 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 alternatives process is on-going and expected to
continue during our 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, in the context of a
dissolution of the Company and following repayment of all bank
debt and termination of our credit facility. 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 terms of that transaction.
2
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 alternative
process, we are unable to determine the approach that best meets
the interests of MedCaths stockholders. In addition, the
summary of net proceeds from the asset and other sales described
in this annual report are only preliminary estimates relating to
those transactions. Final amounts available to stockholders will
be diminished by asset and corporate wind-down related operating
and other expenses, our continued debt service obligations, tax
treatment, inability to collect all amounts owed to us, any
required reserves to address potential liabilities, including
retained and contingent liabilities
and/or other
unforeseen events.
Our
Hospitals
As of September 30, 2010 we had ownership interests in and
operated ten hospitals. Since September 30, 2010, we have
sold our interests in three of these hospitals and have entered
into an agreement to sell one additional hospital. The following
table identifies key characteristics of our hospitals as of
September 30, 2010.
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MedCath
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Opening
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Licensed
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Cath
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Operating
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Hospital
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Location
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Ownership
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Date
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Beds
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Labs
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Rooms
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Arkansas Heart Hospital
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Little Rock, AR
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70.3
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March 1997
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112
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6
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3
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Bakersfield Heart Hospital
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Bakersfield, CA
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53.3
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%
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October 1999
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47
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4
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3
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Heart Hospital of New Mexico
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Albuquerque, NM
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74.8
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October 1999
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55
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5
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4
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Harlingen Medical Center(1)
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Harlingen, TX
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34.8
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October 2002
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112
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2
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10
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Louisiana Heart Hospital
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St. Tammany Parish, LA
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89.2
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February 2003
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137
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3
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7
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Texsan Heart Hospital(4)
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San Antonio, TX
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69.0
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January 2004
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120
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4
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4
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Hualapai Mountain Medical Center
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Kingman, AZ
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82.5
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%
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October 2009
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70
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(2)
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1
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4
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Hospitals Disposed Subsequent to September 30, 2010
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Arizona Heart Hospital(3)
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Phoenix, AZ
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70.6
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June 1998
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59
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3
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4
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Heart Hospital of Austin(3)
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Austin, TX
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70.9
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January 1999
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58
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6
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4
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Avera Heart Hospital of South Dakota(1) (3)
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Sioux Falls, SD
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33.3
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March 2001
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55
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4
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3
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(1) |
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We did not have a majority ownership interest in these hospitals
as of September 30, 2010. We use the equity method of
accounting for these hospitals, which means that we include in
our consolidated statements of income a percentage of the
hospitals reported net income (loss) for each reporting
period. |
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(2) |
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Hualapai Mountain Medical Center is designed to accommodate 106
inpatient beds, but initially opened with 70 licensed beds. |
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(3) |
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The Company disposed of its interest in Avera Heart Hospital of
South Dakota and substantially all of the assets of Arizona
Heart Hospital on October 1, 2010. The Company sold
substantially all of the assets of Heart Hospital of Austin on
November 1, 2010. |
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In November 2010, the Company entered into an agreement to
dispose of its interest in TexSan Heart Hospital. We expect this
transaction to close during our second fiscal quarter of 2011,
which ends March 31, subject to required approvals and
customary closing conditions. |
Diagnostic
and Therapeutic Facilities
We have participated in the development of or have acquired
interests in, and provide management services to, facilities
where physicians diagnose and treat cardiovascular disease and
manage hospital-based cardiac catheterization laboratories. We
also own and operate mobile cardiac catheterization laboratories
serving hospital networks and maintain a number of mobile
cardiac catheterization laboratories that we lease on a
short-term basis. These diagnostic and therapeutic facilities
and mobile cardiac catheterization laboratories are equipped to
allow the physicians using them to employ a range of diagnostic
and treatment options for patients suffering from cardiovascular
disease.
3
Managed Diagnostic and Therapeutic
Facilities. As of September 30, 2010 we
owned and/or
managed the operations of eight cardiac diagnostic and
therapeutic facilities (two are located at Coastal Carolina
Heart, LLC). On November 1, 2010, we disposed of our
interest in Southwest Arizona Heart and Vascular, LLC. The
following table provides information about our facilities.
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MedCath
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Termination
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Management
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or Next
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MedCath
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Commencement
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Renewal
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Facility/Entity
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Location
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Ownership
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Date
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Date
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Joint Ventures:
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Blue Ridge Cardiology Services, LLC(1)
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Morganton, NC
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50.00
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%
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2004
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Dec. 2014
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Central New Jersey Heart Services, LLC(1)
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Trenton, NJ
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14.80
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%
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2007
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Mar 2017
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Coastal Carolina Heart, LLC(1)
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Wilmington, NC
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9.20
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%
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2007
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July 2013
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Managed Ventures:
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Margaret R. Pardee Memorial Hospital(1)
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Hendersonville, NC
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100
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%(2)
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2004
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Month-to-month
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Duke Health Raleigh Hospital(1)
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Raleigh, NC
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100
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%(2)
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2006
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Dec. 2012
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Caldwell Cardiology Services
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Lenoir, NC
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100
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%(2)
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2006
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Mar. 2012
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Presbyterian Hospital Matthews
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Matthews, NC
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100
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%(2)
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2010
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May 2015
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(1) |
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Our management agreement with each of these facilities includes
an option for us to extend the initial term at increments
ranging from one to 10 years, through an aggregate of up to
an additional 40 years for some of the facilities. |
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(2) |
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The ownership interest percentage refers to the fact that we own
100% of the entity that has the management agreement with the
facility. |
Except when the requirements of applicable law require us to
modify our services or when physicians have an ownership
interest in a joint venture providing management services to
hospitals, our management services generally include providing
all non-physician personnel required to deliver patient care and
the administrative, management and support functions required in
the operation of the facility subject to the oversight of the
applicable hospital. The physicians who supervise or perform
diagnostic and therapeutic procedures at these facilities have
complete control over the delivery of cardiovascular healthcare
services. In some cases, the management agreements for these
centers have an extended initial term and several renewal
options ranging from one to 10 years each. The physicians
and hospitals with which we have contracts to operate these
centers may terminate the agreements under certain
circumstances. Either party may terminate most of these
agreements for cause or upon the occurrence of specified
material adverse changes in the business of the facilities.
Interim Mobile Catheterization Labs. We
maintain a rental fleet of mobile cardiac catheterization
laboratories. We lease these laboratories on a short-term basis
to hospitals while they are either adding capacity to their
existing facilities or replacing or upgrading their equipment.
We also lease these laboratories to hospitals that experience a
higher demand for cardiac catheterization procedures during a
particular season of the year and choose not to expand their own
facilities. Our rental laboratories are manufactured by leading
original equipment manufacturers and have advanced technology
and enable cardiologists to perform both diagnostic and
interventional therapeutic procedures. Each of our rental units
is generally in service for an average of nine months of the
year. These units enable us to be responsive to immediate demand
and create flexibility in our operations.
Major
Procedures Performed at Our Facilities
Our hospitals offer a wide range of inpatient and outpatient
medical services. These services can include cardiology,
surgery, orthopedics, diagnostic and emergency room services,
laboratory, radiology, respiratory, nutrition/dietary, intensive
care units and pharmacy.
The following is a brief description of the major cardiovascular
procedures physicians perform at our hospitals and other
facilities.
4
Invasive
Procedures
Cardiac catheterization: percutaneous
intravascular insertion of a catheter into any chamber of the
heart or great vessels for diagnosis, assessment of
abnormalities, interventional treatment and evaluation of the
effects of pathology on the heart and great vessels.
Percutaneous cardiac intervention, including the
following:
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Atherectomy: a technique using a cutting
device to remove plaque from an artery. This technique can be
used for coronary and non-coronary arteries.
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Angioplasty: a method of treating narrowing of
a vessel using a balloon catheter to dilate the narrowed vessel.
If the procedure is performed on a coronary vessel, it is
commonly referred to as a percutaneous transluminal coronary
angioplasty, or PTCA.
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Percutaneous balloon angioplasty: the
insertion of one or more balloons across a stenotic heart valve.
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Stent: a small expandable wire tube, usually
stainless steel, with a self-expanding mesh introduced into an
artery. It is used to prevent lumen closure or restenosis.
Stents can be placed in coronary arteries as well as renal,
aortic and other peripheral arteries. A drug-eluting stent is
coated with a drug that is intended to prevent the stent from
reclogging with scar tissue after a procedure.
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Brachytherapy: a radiation therapy using
implants of radioactive material placed inside a coronary stent
with restenosis.
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Electrophysiology study: a diagnostic study of
the electrical system of the heart. Procedures include the
following:
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Cardiac ablation: removal of a part, pathway
or function of the heart by surgery, chemical destruction,
electrocautery or radio frequency.
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Pacemaker implant: an electrical device that
can substitute for a defective natural pacemaker and control the
beating of the heart by a series of rhythmic electrical
discharges.
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Automatic Internal Cardiac
Defibrillator: cardioverter implanted in patients
at high risk for sudden death from ventricular arrhythmias.
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Cardiac assist devices: a mechanical device
placed inside of a persons chest where it helps the heart
pump oxygen rich blood throughout the body.
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Coronary artery bypass graft surgery: a
surgical establishment of a shunt that permits blood to travel
from the aorta to a branch of the coronary artery at a point
past the obstruction.
Valve Replacement Surgery: an open-heart
surgical procedure involving the replacement of valves that
regulate the flow of blood between chambers in the heart, which
have become narrowed or ineffective due to the
build-up of
calcium or scar tissue or the presence of some other physical
damage.
Non-Invasive
Procedures
Cardiac magnetic resonance imaging: a test
using a powerful magnet to produce highly detailed, accurate and
reproducible images of the heart and surrounding structures as
well as the blood vessels in the body without the need for
contrast agents.
Echocardiogram with color flow doppler, or ultrasound
test: a test which produces real time images of
the interior of the heart muscle and valves, which are used to
accurately evaluate heart valve and muscle problems and measure
heart muscle damage.
Nuclear treadmill exercise test or nuclear
angiogram: a test which involves the injection of
a low level radioactive tracer isotope into the patients
bloodstream during exercise on a motorized treadmill, which is
frequently used to screen patients who may need cardiac
catheterization and to evaluate the results in patients who have
undergone angioplasty or cardiac surgery.
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Standard treadmill exercise test: a test which
involves a patient exercising on a motorized treadmill while the
electrical activity of the patients heart is measured,
which is frequently used to screen for heart disease.
Ultrafast computerized tomography: a test
which can detect the buildup of calcified plaque in coronary
arteries before the patient experiences any symptoms.
Employees
As of September 30, 2010, we employed 2,362 persons,
including 1,678 full-time and 684 part-time employees.
None of our employees is a party to a collective bargaining
agreement and we consider our relationships with our employees
to be good. There currently is a nationwide shortage of nurses
and other medical support personnel, which makes recruiting and
retaining these employees difficult. We believe we offer our
employees competitive wages and benefits and offer a
professional work environment that we believe helps us recruit
and retain the staff we need to operate our hospitals and other
facilities.
We have experienced attrition at our corporate office as a
result of our strategic alternatives process. We have offered
stay bonuses to many of our employees to encourage them to
remain during the process.
Our hospitals are staffed by licensed physicians who have been
admitted to the medical staffs of individual hospitals. Any
licensed physician not just our physician
partners may apply to be admitted to the medical
staff of any of our hospitals, but admission to the staff must
be approved by the hospitals medical staff and governing
board in accordance with established credentialing criteria, and
policies and procedures.
Environmental
Matters
We are subject to various federal, state and local laws and
regulations governing the use, storage, discharge and disposal
of hazardous materials, including medical waste products. We
believe that all of our facilities and practices comply with
these laws and regulations and we do not anticipate that any of
these laws will have a material adverse effect on our
operations. We cannot predict, however, whether environmental
issues may arise in the future.
Insurance
Like most healthcare providers, we are subject to claims and
legal actions in the ordinary course of business. To cover these
claims, we maintain professional malpractice liability insurance
and general liability insurance in amounts and with deductibles
and levels of self-insured retention that we believe are
sufficient for our operations. We also maintain umbrella
liability coverage to cover claims not covered by our
professional malpractice liability or general liability
insurance policies. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies
General and Professional Liability Risk.
We can offer no assurances that our professional liability and
general liability insurance, nor our recorded reserves for
self-insured retention, will cover all claims against us or
continue to be available at reasonable costs for us to maintain
adequate levels of insurance in the future.
Competition
We compete primarily with other cardiovascular care providers,
principally for-profit and
not-for-profit
general acute care hospitals. In most of our markets we compete
for market share of cardiovascular procedures with two to three
hospitals. Some of the hospitals that compete with our hospitals
are owned by governmental agencies or
not-for-profit
corporations supported by endowments and charitable
contributions and can finance capital expenditures and
operations on a tax-exempt basis. Some of our competitors are
larger and are more established than we are and, have greater
geographic coverage, offer a wider range of services or have
more capital or other resources than we do. If our competitors
are able to finance capital improvements, recruit physicians,
expand services or obtain favorable managed care contracts at
their facilities, we may experience a decline in market share.
In operating our hospitals, particularly in performing
outpatient procedures, we compete with free-standing diagnostic
and therapeutic facilities located in the same markets.
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Reimbursement
Medicare. Medicare is a federal program that
provides hospital and medical insurance benefits to persons
age 65 and over, some disabled persons and persons with
end-stage renal disease. Under the Medicare program, we are paid
for certain inpatient and outpatient services performed by our
hospitals and also for services provided at our diagnostic and
therapeutic facilities.
Medicare payments for inpatient acute services are generally
made pursuant to a prospective payment system (PPS).
Under this system, hospitals are paid a prospectively determined
fixed amount for each hospital discharge based on the
patients diagnosis. Specifically, each discharge is
assigned to a DRG. Based upon the patients condition and
treatment during the relevant inpatient stay, each DRG is
assigned a fixed payment rate that is prospectively set using
national average costs per case for treating a patient for a
particular diagnosis. The DRG rates are adjusted by an update
factor each federal fiscal year, which begins on October 1.
The update factor is determined, in part, by the projected
increase in the cost of goods and services that are purchased by
hospitals, referred to as the market basket index. DRG payments
do not consider the actual costs incurred by a hospital in
providing a particular inpatient service; however, such payments
are adjusted by a predetermined geographic adjustment factor
assigned to the geographic area in which the hospital is located.
While hospitals generally do not receive direct payments in
addition to a DRG payment, hospitals may qualify for an outlier
payment when the relevant patients treatment costs are
extraordinarily high and exceed a specified threshold. Outlier
payments, which were established by Congress as part of the DRG
prospective payment system, are additional payments made to
hospitals for treating patients who are costlier to treat than
the average patient. In general, a hospital receives outlier
payments when its costs, as determined by using gross charges
adjusted by the hospitals
cost-to-charge
ratio, exceed a certain threshold established annually by the
Centers for Medicare and Medicaid Services (CMS).
Outlier payments are currently subject to multiple factors
including but not limited to: (1) the hospitals
estimated operating costs based on its historical ratio of costs
to gross charges; (2) the patients case acuity;
(3) the CMS established threshold; and, (4) the
hospitals geographic location. CMS is required by law to
limit total outlier payments to between five and six percent of
total DRG payments. CMS periodically changes the threshold in
order to bring expected outlier payments within the mandated
limit. An increase to the cost threshold reduces total outlier
payments by (1) reducing the number of cases that qualify
for outlier payments and (2) reducing the dollar amount
hospitals receive for those cases that qualify. CMS historically
has used a hospitals most recently settled cost report to
set the hospitals
cost-to-charge
ratios. Those cost reports are typically two to three years old.
On August 22, 2007, CMS issued its final inpatient hospital
prospective payment system rule for fiscal year 2008, which
began October 1, 2007. The final rule continues major DRG
reforms designed to improve the accuracy of hospital payments.
As introduced in the fiscal year 2007 final rule, CMS will
continue to use hospital costs rather than charges to set
payment rates. For fiscal year 2008, hospitals were paid based
upon a blend of
1/3
charge-based weights and
2/3
hospital cost-based weights for DRGs. Additionally, CMS adopted
its proposal to restructure the current 538 DRGs to 745 MS-DRGs
(severity-adjusted DRGs) to better recognize severity of patient
illness. These MS-DRGs were phased in over a two-year period.
CMS published the inpatient prospective payment system rule
(IPPS) for 2009 on August 19, 2008. In addition
to provisions which relate to IPPS payments, the 2009 IPPS final
rule also contained provisions related to the Emergency Medical
Treatment and Active Labor Act (EMTALA) and the
Section 1877 of the Social Security Act, commonly known as
the Stark Law, which will be discussed under the applicable
EMTALA and Stark sections of this document. CMS also expanded
the list of codes of hospital-acquired conditions for which CMS
will not pay as secondary diagnoses unless the condition was
present on admission. Due to the late enactment of the Medicare
Improvements for Patient and Providers Act (MIPPA),
CMS was unable to publish final rates in the 2009 IPPS final
rule.
CMS issued the IPPS rule for 2010 on July 31, 2009. The
Final IPPS rule for 2010 provides acute care hospitals with an
inflation update of 2.1 percent in their 2010 payment
rates. The Final IPPS rule also adds four new measures for which
hospitals must submit data under the Reporting Hospital Quality
Data for Annual Payment Update (RHQDAPU) program to
receive the full market basket update.
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CMS published an updated IPPS for 2010 on May 21, 2010
which included a 0.25% market basket reduction and a related
reduction to the outlier threshold. The market basket adjustment
applies to discharges on or after April 1, 2010 and before
October 1, 2010.
CMS published the IPPS for 2011 on July 30, 2010, which
includes the following payment and policy changes effective for
discharges on or after October 1, 2010, the beginning of
the Companys fiscal 2011: a net inflation update of 2.35%;
a net increase of 1.25% for MS-DRG capital payments; an
additional reduction of 2.9% to the operating and capital rate
updates to recoup 50% of the estimated overpayments in 2008 and
2009 due to hospital coding and documentation processes in
connection with the transition to MS-DRGs; a decrease in the
cost outlier threshold from $23,135 to $23,075; and the addition
of 12 new quality measures to the RHQDAPU program set and the
retirement of one measure (10 of the new measures will be
considered in determining a hospitals 2012 update; the
remaining two measures to be reported in 2011 will be considered
in a hospitals 2013 update).
Outpatient services are also subject to a prospective payment
system. Services provided at our freestanding diagnostic
facilities are typically reimbursed on the basis of the
physician fee schedule, which is revised periodically, and bases
payment on various factors including resource-based practice
expense relative value units and geographic practice cost
indices.
Future legislation may modify Medicare reimbursement for
inpatient and outpatient services provided at our hospitals or
services provided at our diagnostic and therapeutic facilities,
but we are not able to predict the method or amount of any such
reimbursement changes or the effect that such changes will have
on us.
Medicaid. Medicaid is a health insurance
program for low-income individuals, which is funded jointly by
the federal and individual state governments and administered
locally by each state. Most state Medicaid payments for
hospitals are made under a prospective payment system or under
programs that negotiate payment levels with individual
hospitals. Medicaid reimbursement is often less than a
hospitals cost of services. States periodically consider
significantly reducing Medicaid funding, while at the same time
in some cases expanding Medicaid benefits. This could adversely
affect future levels of Medicaid payments received by our
hospitals. We are unable to predict what impact, if any, future
Medicaid managed care systems might have on our operations.
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
adversely affect our business. There can be no assurance that
payments for hospital services and cardiac diagnostic and other
procedures under the Medicare and Medicaid programs will
continue to be based on current methodologies or remain
comparable to present levels. In this regard, we may be subject
to rate reductions as a result of federal budgetary or other
legislation related to the Medicare and Medicaid programs. In
addition, various state Medicaid programs periodically
experience budgetary shortfalls, which may result in Medicaid
payment reductions and delays in payment to us.
Utilization Review. Federal law contains
numerous provisions designed to ensure that services rendered by
hospitals to Medicare and Medicaid patients meet professionally
recognized standards and are medically necessary and that claims
for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and
Medicaid patients be reviewed by quality improvement
organizations that analyze the appropriateness of Medicare and
Medicaid patient admissions and discharges, quality of care
provided, validity of DRG classifications and appropriateness of
cases of extraordinary length of stay or cost. Quality
improvement organizations may deny payment for services
provided, assess fines and recommend to the Department of Health
and Human Services (HHS) that a provider not in substantial
compliance with the standards of the quality improvement
organization be excluded from participation in the Medicare
program. Most non-governmental managed care organizations also
require utilization review. As noted above, the Final IPPS rule
also adds four new measures for which hospitals must submit data
under the RHQDAPU program to receive the full market basket
update.
Annual Cost Reports. Hospitals participating
in the Medicare and some Medicaid programs, whether paid on a
reasonable cost basis or under a prospective payment system, are
required to meet certain financial reporting requirements.
Federal and, where applicable, state regulations require
submission of annual cost reports identifying
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medical costs and expenses associated with the services provided
by each hospital to Medicare beneficiaries and Medicaid
recipients.
Annual cost reports required under the Medicare and some
Medicaid programs are subject to routine governmental audits.
These audits may result in adjustments to the amounts ultimately
determined to be due to us under these reimbursement programs
and result in a recoupment of monies paid. Finalization of these
audits and determination of amounts earned under these programs
often takes several years. Providers can appeal any final
determination made in connection with an audit.
Program Adjustments. The Medicare, Medicaid
and other federal healthcare programs are subject to statutory
and regulatory changes, administrative rulings, interpretations
and determinations, and requirements for utilization review and
new governmental funding restrictions, all of which may
materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payment
to facilities. The final determination of amounts earned under
the programs often requires many years, because of audits by the
program representatives, providers rights of appeal and
the application of numerous technical reimbursement provisions.
We believe that we have made adequate provision for such
adjustments. Until final adjustment, however, previously
determined allowances could become either inadequate or more
than ultimately required.
Commercial Insurance. Our hospitals provide
services to individuals covered by private healthcare insurance.
Private insurance carriers pay our hospitals or in some cases
reimburse their policyholders based upon the hospitals
established charges and the coverage provided in the insurance
policy. Commercial insurers are trying to limit the costs of
hospital services by negotiating discounts, and including the
use of prospective payment systems, which would reduce payments
by commercial insurers to our hospitals. Reductions in payments
for services provided by our hospitals to individuals covered by
commercial insurers could adversely affect us. We cannot predict
whether or how payment by third party payors for the services
provided by all hospitals and other facilities may change or
whether these payors will elect to audit paid claims and attempt
to recover resulting overpayments. Modifications in methodology
or reductions in payment or future audits by these payors could
adversely affect us.
Regulation
Overview. The healthcare industry is required
to comply with extensive government regulation at the federal,
state and local levels. Under these laws and regulations,
hospitals must meet requirements to be licensed under state law
and be certified to participate in government programs,
including the Medicare and Medicaid programs. These requirements
relate to matters such as the adequacy of medical care,
equipment, personnel, operating policies and procedures,
emergency medical care, maintenance of records, relationships
with physicians, cost reporting and claim submission,
rate-setting, compliance with building codes and environmental
protection. There are also extensive government regulations that
apply to our owned and managed facilities and the physician
practices that we manage. If we fail to comply with applicable
laws and regulations, we could be subject to criminal penalties
and civil sanctions and our hospitals and other facilities could
lose their licenses and their ability to participate in the
Medicare, Medicaid and other federal and state healthcare
programs. In addition, government laws and regulations, or the
interpretation of such laws and regulations, may change. If that
happens, we may have to make changes in our facilities,
equipment, personnel, services or business structures so that
our hospitals and other healthcare facilities remain qualified
to participate in these programs. We believe that our hospitals
and other healthcare facilities are in substantial compliance
with current federal, state, and local regulations and standards.
The
Medicare Modernization Act
The Medicare Prescription Drug Improvement and Modernization Act
of 2003 (the Medicare Modernization Act) made
significant changes to the Medicare program, particularly with
respect to the coverage of prescription drugs. These
modifications also include provisions affecting Medicare
coverage and reimbursement to general acute care hospitals, as
well as other types of providers.
Health
Care Reform Laws
In March 2010, President Obama signed the Patient Protection and
Affordable Care Act as amended by the Health Care and Education
Reconciliation Act of 2010 (Health Care Reform Laws)
thereby making it effective.
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The new law will result in sweeping changes across the health
care industry. The primary goal of this comprehensive
legislation is to extend health coverage to approximately
32 million uninsured legal U.S. residents through a
combination of public program expansion and private sector
health insurance reforms. To fund the expansion of insurance
coverage, the legislation contains measures designed to promote
quality and cost efficiency in health care delivery and to
generate budgetary savings in the Medicare and Medicaid
programs. As described below, the Health Care Reform Laws
effectively prevents new physician-owned hospitals after
March 23, 2010 and limits the capacity and amounts of
physician ownership in existing physician-owned hospitals. We
are unable to predict the full impact of the Health Care Reform
Laws at this time due to the laws complexity and current
lack of implementing regulations or interpretive guidance.
However, we expect that several provisions of the Health Care
Reform Laws will have a material effect on our business as
further described under Item 1A. Risk Factors.
The healthcare industry continues to attract much legislative
interest and public attention. Recent proposals that have been
considered include changes in Medicare, Medicaid, and other
state and federal programs and cost controls on hospitals. We
cannot predict the final impact of the Health Care Reform Laws
or other future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare
programs and the effect that any legislation, interpretation, or
change may have on us. Such effects may include material and
adverse changes to the amounts of reimbursement received by our
facilities.
Licensure
and Certification
Licensure and Accreditation. Our hospitals are
subject to state and local licensing requirements. In order to
verify compliance with these requirements, our hospitals are
subject to periodic inspection by state and local authorities.
All of our majority-owned hospitals are licensed as general
acute care hospitals under applicable state law. In addition,
our hospitals are accredited by The Joint Commission, a
nationwide commission which establishes standards relating to
physical plant, administration, quality of patient care and
operation of hospital medical staffs.
Certification. In order to participate in the
Medicare and Medicaid programs, each provider must meet
applicable regulations of the HHS and similar state entities
relating to, among other things, the type of facility,
equipment, personnel, standards of medical care and compliance
with applicable federal, state and local laws. As part of such
participation requirements, all physician-owned hospitals are
required to provide written notice to patients that the hospital
is physician-owned. Additionally, as part of a patient safety
measure, all Medicare-participating hospitals must provide
written notice to patients if a doctor is not present in the
hospital 24 hours per day, 7 days a week. All our
hospitals and our freestanding diagnostic facility are certified
to participate or are enrolled in the Medicare and Medicaid
programs.
Emergency Medical Treatment and Active Labor
Act. The Emergency Medical Treatment and Active
Labor Act impose requirements as to the care that must be
provided to anyone who seeks care at facilities providing
emergency medical services. In addition, CMS issued final
regulations clarifying those areas within a hospital system that
must provide emergency treatment, procedures to meet on-call
requirements, as well as other requirements under EMTALA, such
as the availability of on call physicians and obligations of
recipient hospitals with specialized capabilities. Sanctions for
failing to fulfill these requirements include exclusion from
participation in the Medicare and Medicaid programs and civil
monetary penalties. In addition, the law creates private civil
remedies that enable an individual who suffers personal harm as
a direct result of a violation of the law to sue the offending
hospital for damages and equitable relief. A hospital that
suffers a financial loss as a direct result of another
participating hospitals violation of the law also has a
similar right. Although we believe that our emergency care
practices are in compliance with the law and applicable
regulations, we cannot assure you that governmental officials
responsible for enforcing the law or others will not assert that
we are in violation of these laws nor what obligations may be
imposed by regulations to be issued in the future.
Certificate of Need Laws. In some states, the
construction of new facilities, the acquisition of existing
facilities or the addition of new beds, equipment, or services
may be subject to review by state regulatory agencies under a
certificate of need program. These laws generally require
appropriate state agency determination of public need and
approval prior to the addition of equipment, beds or services.
Currently, we do not operate any hospitals in states that have
adopted certificate of need laws. We operate diagnostic
facilities in some states with certificate of need laws and we
believe they are operated in compliance with applicable
requirements or are exempt from such
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requirements. However, we cannot assure you that government
officials will agree with our interpretation of these laws.
Professional Licensure. Healthcare
professionals who perform services at our hospitals and
diagnostic and therapeutic facilities are required to be
individually licensed or certified under applicable state law.
Our facilities are required to have by-laws relating to the
credentialing process, or otherwise document appropriate medical
staff credentialing. We take steps to ensure that our employees
and agents and physicians on each hospitals medical staff
have all necessary licenses and certifications, and we believe
that the medical staff members, as well as our employees and
agents comply with all applicable state licensure laws as well
as any hospital by-laws applicable to credentialing activities.
However, we cannot assure you that government officials will
agree with our position.
Corporate Practice of Medicine and
Fee-Splitting. Some states have laws that
prohibit unlicensed persons or business entities, including
corporations, from employing physicians. Some states also have
adopted laws that prohibit physician ownership in healthcare
facilities or otherwise restrict direct or indirect payments or
fee-splitting arrangements between physicians and unlicensed
persons or business entities. Possible sanctions for violations
of these restrictions include loss of a physicians
license, civil and criminal penalties, and rescission of the
business arrangements. These laws vary from state to state, are
often vague, and in most states have seldom been interpreted by
the courts or regulatory agencies. We have attempted to
structure our arrangements with healthcare providers to comply
with the relevant state law. However, we cannot assure you that
governmental officials charged with responsibility for enforcing
these laws will not assert that we, or the transactions in which
we are involved, are in violation of these laws. These laws may
also be interpreted by the courts in a manner inconsistent with
our interpretations.
Fraud
and Abuse Laws
Overview. Various federal and state laws
govern financial and other arrangements among healthcare
providers and prohibit the submission of false or fraudulent
claims to the Medicare, Medicaid and other government healthcare
programs. Penalties for violation of these laws include civil
and criminal fines, imprisonment and exclusion from
participation in federal and state healthcare programs. For
example the Health Insurance Portability and Accountability Act
of 1996 (HIPAA) broadened the scope of certain fraud
and abuse laws by adding several civil and criminal statutes
that apply to all healthcare services, whether or not they are
reimbursed under a federal healthcare program. Among other
things, HIPAA established civil monetary penalties for certain
conduct, including upcoding and billing for medically
unnecessary goods or services. In addition, the federal False
Claims Act allows an individual to bring a lawsuit on behalf of
the government, in what are known as qui tam or whistleblower
actions, alleging false Medicare or Medicaid claims or other
violations of the statute. The use of these private enforcement
actions against healthcare providers has increased dramatically
in the recent past, in part because the individual filing the
initial complaint may be entitled to share in a portion of any
settlement or judgment.
Anti-Kickback Statute. The federal
anti-kickback statute prohibits providers of healthcare and
others from soliciting, receiving, offering, or paying, directly
or indirectly, any type of remuneration in connection with the
referral of patients covered by the federal healthcare programs.
Violations of the anti-kickback statute may be punished by a
criminal fine of up to $25,000 or imprisonment for each
violation, civil fines of up to $50,000, damages of up to three
times the total dollar amount involved, and exclusion from
federal healthcare programs, including Medicare and Medicaid.
As authorized by Congress, the Office of Inspector General of
the Department of HHS (OIG) has published safe
harbor regulations that describe activities and business
relationships that are deemed protected from prosecution under
the anti-kickback statute. However, the failure of a particular
activity to comply with the safe harbor regulations does not
mean that the activity violates the anti-kickback statute. There
are safe harbors for various types of arrangements, including
those for personal services and management contracts and others
for investment interests, such as stock ownership in companies
with more than $50 million in undepreciated net tangible
assets related to healthcare items and services. This publicly
traded company safe harbor contains additional criteria,
including that the stock must be obtained on terms and at a
price equally available to the public when trading on a
registered securities exchange.
The OIG is primarily responsible for enforcing the anti-kickback
statute and generally for identifying fraud and abuse activities
affecting government programs. In order to fulfill its duties,
the OIG performs audits and
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investigations. In addition, the agency provides guidance to
healthcare providers by issuing Special Fraud Alerts and
Bulletins that identify types of activities that could violate
the anti-kickback statute and other fraud and abuse laws. The
OIG has identified the following arrangements with physicians as
potential violations of the statute:
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payment of any incentive by the hospital each time a physician
refers a patient to the hospital,
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use of free or significantly discounted office space or
equipment for physicians,
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provision of free or significantly discounted billing, nursing,
or other staff services,
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free training for a physicians office staff including
management and laboratory techniques,
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guarantees which provide that if the physicians income
fails to reach a predetermined level, the hospital will pay any
portion of the remainder,
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low-interest or interest-free loans, or loans which may be
forgiven if a physician refers patients to the hospital,
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payment of the costs of a physicians travel and expenses
for conferences,
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payment of services which require few, if any, substantive
duties by the physician, or payment for services in excess of
the fair market value of the services rendered, or
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purchasing goods or services from physicians at prices in excess
of their fair market value.
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We have a variety of financial relationships with physicians who
refer patients to our hospitals and other facilities. Physicians
own interests in each of our hospitals, some of our cardiac
catheterization laboratories and in entities that provide only
management services to certain non-affiliated hospitals.
Physicians may also own MedCath Corporation common stock. We
also have contracts with physicians providing for a variety of
financial arrangements, including leases, management agreements,
independent contractor agreements, right of first refusal
agreements, medical director and professional service
agreements. Although we believe that our arrangements with
physicians have been structured to comply with the current law
and available interpretations, some of our arrangements do not
expressly meet the requirements for safe harbor protection. We
cannot assure you that regulatory authorities will not determine
that these arrangements violate the anti-kickback statute or
other applicable laws. Also, most of the states in which we
operate have adopted anti-kickback laws, some of which apply
more broadly to all payors, not just to federal healthcare
programs. Many of these state laws do not have safe harbor
regulations comparable to the federal anti-kickback law and have
only rarely been interpreted by the courts or other government
agencies. If our arrangements were found to violate any of these
federal or state anti-kickback laws we could be subject to
criminal and civil penalties
and/or
possible exclusion from participating in Medicare, Medicaid, or
other governmental healthcare programs.
Physician Self-Referral Law. Section 1877
of the Social Security Act, commonly known as the Stark Law,
prohibits physicians from referring Medicare and Medicaid
patients for certain designated health services to entities in
which physicians or any of their immediate family members have a
direct or indirect ownership or compensation arrangement unless
an exception applies. The term designated health
services, includes inpatient and outpatient hospital
services, and some radiology services. Sanctions for violating
the Stark Law include civil monetary penalties, including up to
$15,000 for each improper claim and $100,000 for any
circumvention scheme, and exclusion from the Medicare or
Medicaid programs. There are various ownership and compensation
arrangement exceptions to the self-referral prohibition,
including an exception for a physicians ownership in an
entire hospital as opposed to an ownership interest
in a hospital department if the physician is
authorized to perform services at the hospital. This exception
is commonly referred to as the whole hospital
exception. There is also an exception for ownership of
publicly traded securities in a company that has stockholder
equity exceeding $75 million at the end of its most recent
fiscal year or on average during the three previous fiscal
years, as long as the physician acquired the securities on terms
generally available to the public and the securities are traded
on one of the major exchanges. Additionally, there is an
exception for certain indirect ownership and compensation
arrangements. Exceptions are also provided for many of the
customary financial arrangements between physicians and
providers, including employment contracts, personal service
arrangements, isolated financial transactions, payments by
physicians, leases, and recruitment agreements, as long as these
arrangements meet certain conditions.
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As discussed, there are various ownership and compensation
arrangement exceptions to the Stark Law. In addressing the whole
hospital exception, the Stark regulations specifically reiterate
the statutory requirements for the exception. Additionally, the
exception requires that the hospital qualify as a
hospital under the Medicare program. The Stark Law
and the Stark Regulations may also apply to certain compensation
arrangements between hospitals and physicians.
The Deficit Reduction Act of 2005 (DRA) required the
Secretary of HHS to develop a plan addressing several issues
concerning physician investment in specialty hospitals. In
August 2006, HHS submitted its required final report to Congress
addressing: (1) proportionality of investment return;
(2) bona fide investment; (3) annual disclosure of
investment; (4) provision of care to Medicaid
beneficiaries; (5) charity care; and (6) appropriate
enforcement. The report reaffirms HHS intention to
implement reforms to increase Medicare payment accuracy in the
hospital inpatient prospective and ambulatory surgical center
payment systems. HHS also has implemented certain
gainsharing demonstrations are required by the DRA
and other value-based payment approaches designed to align
physician and hospital incentives while achieving measurable
improvements in quality to care. In addition, HHS now requires
transparency in hospital financial arrangements with physicians.
Currently, all hospitals are required to provide HHS information
concerning physician investment and compensation arrangements
that potentially implicate the physician self-referral statute,
and to disclose to patients whether they have physician
investors. Hospitals that do not comply in a timely manner with
this disclosure requirement may face civil penalties of $10,000
per day that they are in violation. As noted below, the Health
Care Reform Laws also subject a physician-owned hospital to
reporting requirements and extensive disclosure requirements on
the hospitals website and in any public advertisements.
HHS also announced its position that non-proportional returns on
investments and non-bona fide investments may violate the
physician self-referral statute and are suspect under the
anti-kickback statute. Other components of the plan include
providing further guidance concerning what is expected of
hospitals that do not have emergency departments under EMTALA
and changes in the Medicare enrollment form to identify
specialty hospitals. Issuance of the strategic plan coincided
with the sunset of a DRA provision suspending enrollment of new
specialty hospitals into the Medicare program.
In July 2007 as part of proposed revisions to the Medicare
physician fee schedule for fiscal year 2008, CMS proposed
certain additional changes to the Stark Law. In particular, the
proposed rule would revise the Stark Law exception for space and
equipment rentals. In instances where a physician leases space
or equipment to an entity who accepts patients referred by that
physician, the CMS proposal would no longer allow
unit-of-service
or per click payments for such leases. Additionally,
the proposed rule would no longer treat under
arrangements between hospitals and physician-owned
entities as compensation instead of ownership relationships. CMS
finalized these proposed changes to the Stark Law in the 2009
IPPS final rule published on August 19, 2008. These changes
were effective October 1, 2009. Specifically, the 2009 IPPS
final rule limits the ability of hospitals to enter into under
arrangements with physicians and physician-owned entities and
thus, physician-owned joint venture entities deemed to be
performing DHS will have to comply with one of the
more limited Stark Law ownership exceptions, rather
than the previously acceptable Stark Law
compensation exceptions. In addition, the 2009 IPPS
final rule finalized the prohibition on per unit compensation in
space and equipment lease transactions. Effective
October 1, 2009, we restructured certain equipment lease
transactions with physicians that include per unit or per use
compensation as well as certain of our arrangements with
community hospitals in order to comply with these new rules and
regulations. While we believe that such restructured
arrangements comply with applicable law, we cannot be assured,
however, that if reviewed, government officials will agree with
our interpretation of applicable law.
There have been few enforcement actions taken and relatively few
cases interpreting the Stark Law to date. As a result, there is
little indication as to how courts will interpret and apply the
Stark Law; however, enforcement is expected to increase. We
believe we have structured our financial arrangements with
physicians to comply with the statutory exceptions included in
the Stark Law and the Stark regulations. In particular, we
believe that our physician ownership arrangements meet the whole
hospital exception. In addition, we expect to meet other
exceptions as appropriate for other financial arrangements with
physicians. The single freestanding diagnostic facility that we
own does not furnish any designated health services as defined
under the Stark Law, and thus referrals to it is not subject to
the Stark Laws prohibitions.
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The Health Care Reform Laws also made changes to the Stark Law,
effectively preventing new physician-owned hospitals after
March 23, 2010 and limiting the capacity and amount of
physician ownership in existing physician-owned hospitals. As
revised, the Stark law prohibits physicians from referring
Medicare patients to a hospital in which they have an ownership
or investment interest unless the hospital has physician
ownership and a Medicare provider agreement as of March 23,
2010 (or, for those hospitals under development, as of
December 31, 2010). A physician-owned hospital that meets
these requirements will still be subject to restrictions that
limit the hospitals aggregate physician ownership and,
with certain narrow exceptions for high Medicaid hospitals,
prohibit expansion of the number of operating rooms, procedure
rooms or beds. The legislation also subjects a physician-owned
hospital to reporting requirements and extensive disclosure
requirements on the hospitals website and in any public
advertisements.
Moreover, as noted above, states in which we operate also have
physician self-referral laws, which may prohibit certain
physician referrals or require certain disclosures. Some of
these state laws would apply regardless of the source of payment
for care. These statutes typically provide criminal and civil
penalties as well as loss of licensure and may have broader
prohibitions than the Stark Law or more limited exceptions.
While there is little precedent for the interpretation or
enforcement of these state laws, we believe we have structured
our financial relationships with physicians and others to comply
with applicable state laws. In addition, existing state
self-referral laws may be amended. We cannot predict whether new
state self-referral laws or amendments to existing laws will be
enacted or, once enacted, their effect on us, and we have not
researched pending legislation in all the states in which our
hospitals are located.
Civil Monetary Penalties. The Social Security
Act contains provisions imposing civil monetary penalties for
various fraudulent
and/or
abusive practices, including, among others, hospitals which
knowingly make payments to a physician as an inducement to
reduce or limit medically necessary care or services provided to
Medicare or Medicaid beneficiaries. In July 1999, the OIG issued
a Special Advisory Bulletin on gainsharing arrangements. The
bulletin warns that clinical joint ventures between hospitals
and physicians may implicate these provisions as well as the
anti-kickback statute, and specifically refers to specialty
hospitals, which are marketed to physicians in a position to
refer patients to the hospital, and structured to take advantage
of the whole hospital exception. Hospitals specializing in
heart, orthopedic, and maternity care are mentioned, and the
bulletin states that these hospitals may induce
investor-physicians to reduce services to patients through
participation in profits generated by cost savings, in violation
of a civil monetary penalty provision. Despite this initial
broad interpretation of this civil monetary penalty law, since
2005 the OIG has issued nine advisory opinions which declined to
sanction a particular gainsharing arrangement under this civil
monetary penalty provision, or the anti-kickback statute,
because of the specific circumstances and safeguards built into
the arrangement. We believe that the ownership distributions
paid to physicians by our hospitals do not constitute payments
made to physicians under gainsharing arrangements. We cannot
assure you, however, that government officials will agree with
our interpretation of applicable law.
False Claims Prohibitions. False claims are
prohibited by various federal criminal and civil statutes. In
addition, the federal False Claims Act prohibits the submission
of false or fraudulent claims to the Medicare, Medicaid, and
other government healthcare programs. Penalties for violation of
the False Claims Act include substantial civil and criminal
fines, including treble damages, imprisonment, and exclusion
from participation in federal healthcare programs. In addition,
the False Claims Act allows an individual to bring lawsuits on
behalf of the government, in what are known as qui tam or
whistleblower actions, alleging false Medicare or Medicaid
claims or other violations of the statute.
A number of states, including states in which we operate, have
adopted their own false claims provisions as well as their own
whistleblower provisions whereby a private party may file a
civil lawsuit in state court. In fact, the DRA contains
provisions which create incentives for states to enact
anti-fraud legislation modeled after the federal False Claims
Act.
Healthcare
Industry Investigations
The federal government, private insurers and various state
enforcement agencies have increased their scrutiny of
providers business arrangements and claims in an effort to
identify and prosecute fraudulent and abusive practices. There
are ongoing federal and state investigations in the healthcare
industry regarding multiple issues
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including cost reporting, billing and charge-setting practices,
unnecessary utilization, physician recruitment practices,
physician ownership of healthcare providers and joint ventures
with hospitals. Certain of these investigations have targeted
hospitals and physicians. We have substantial Medicare, Medicaid
and other governmental billings, which could result in
heightened scrutiny of our operations. We continue to monitor
these and all other aspects of our business and have developed a
compliance program to assist us in gaining comfort that our
business practices are consistent with both legal requirements
and current industry standards. However, because the federal and
state fraud and abuse laws are complex and constantly evolving,
we cannot assure you that government investigations will not
result in interpretations that are inconsistent with industry
practices, including ours. Evolving interpretations of current
or the adoption of new federal or state laws or regulations
could affect many of the arrangements entered into by each of
our hospitals. In public statements surrounding current
investigations, governmental authorities have taken positions on
a number of issues, including some for which little official
interpretation previously has been available, that appear to be
inconsistent with practices that have been common within the
industry and that previously have not been challenged in this
manner. In some instances, government investigations that in the
past have been conducted under the civil provisions of federal
law may now be conducted as criminal investigations.
A number of healthcare investigations are national initiatives
in which federal agencies target an entire segment of the
healthcare industry. One example involved the federal
governments initiative regarding hospitals improper
requests for separate payments for services rendered to a
patient on an outpatient basis within three days prior to the
patients admission to the hospital, where reimbursement
for such services is included as part of the reimbursement for
services furnished during an inpatient stay. The government
targeted all hospital providers to ensure conformity with this
reimbursement rule. Further, the federal government continues to
investigate Medicare overpayments to prospective payment system
hospitals that incorrectly report transfers of patients to other
prospective payment system hospitals as discharges. Law
enforcement authorities, including the OIG and the United States
Department of Justice, are also increasing scrutiny of various
types of arrangements between healthcare providers and potential
referral sources, including so-called contractual joint
ventures, to ensure that the arrangements are not designed as a
mechanism to exchange remuneration for patient care referrals
and business opportunities. Investigators have also demonstrated
a willingness to look behind the formalities of a business
transaction to determine the underlying purpose of payments
between healthcare providers and potential referral sources.
Recently, the OIG has also begun to investigate certain
hospitals with a particularly high proportion of Medicare
reimbursement resulting from outlier payments. The OIGs
workplan has indicated its intention to review hospital
privileging activities within the context of Medicare conditions
of participation.
It is possible that governmental or regulatory authorities could
initiate investigations on these or other subjects at our
facilities and such investigations could result in significant
costs in responding to such investigations and penalties to us,
as well as adverse publicity, declines in the value of our
equity and debt securities and lawsuits brought by holders of
those securities. It is also possible that our executives,
managers and hospital board members, many of whom have worked at
other healthcare companies that are or may become the subject of
federal and state investigations and private litigation, could
be included in governmental investigations or named as
defendants in private litigation. The positions taken by
authorities in any investigations of us, our executives,
managers, hospital board members or other healthcare providers,
and the liabilities or penalties that may be imposed could have
a material adverse effect on our business, financial condition
and results of operations.
We are the subject of a civil investigative demand and an
investigation by the Department of Justice as further described
under Item 1A Risk
Factors Companies within the healthcare
industry continue to be the subject of federal and state
investigations.
Clinical
Trials at Hospitals
Our hospitals serve as research sites for physician clinical
trials sponsored by pharmaceutical and device manufacturers and
therefore may perform services on patients enrolled in those
studies, including implantation of experimental devices. Only
physicians who are members of the medical staff of the hospital
may participate in such studies at the hospital. All trials are
approved by an Institutional Review Board (IRB),
which has the responsibility to review and monitor each study
pursuant to applicable law and regulations. Such clinical trials
are subject to numerous regulatory requirements.
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The industry standard for conducting preclinical testing is
embodied in the investigational new drug regulations
administered by the federal Food and Drug Administration (the
FDA). Research conducted at institutions supported
by funds from the National Institutes of Health must also comply
with multiple project assurance agreements and with regulations
and guidelines governing the conduct of clinical research that
are administered by the National Institutes of Health, the HHS
Office of Research Integrity, and the Office of Human Research
Protection. Research funded by the National Institutes of Health
must also comply with the federal financial reporting and record
keeping requirements incorporated into any grant contract
awarded. The requirements for facilities engaging in clinical
trials are set forth in the code of federal regulations and
published guidelines. Regulations related to good clinical
practices and investigational new drugs have been mandated by
the FDA and have been adopted by similar regulatory authorities
in other countries. These regulations contain requirements for
research, sponsors, investigators, IRBs, and personnel engaged
in the conduct of studies to which these regulations apply. The
regulations require that written protocols and standard
operating procedures are followed during the conduct of studies
and for the recording, reporting, and retention of study data
and records. CMS also imposes certain requirements for billing
of services provided in connection with clinical trials.
The FDA and other regulatory authorities require that study
results and data submitted to such authorities are based on
studies conducted in accordance with the provisions related to
good clinical practices and investigational new drugs. These
provisions include:
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complying with specific regulations governing the selection of
qualified investigators,
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obtaining specific written commitments from the investigators,
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disclosure of financial
conflicts-of-interest,
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verifying that patient informed consent is obtained,
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instructing investigators to maintain records and reports,
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verifying drug or device safety and efficacy,
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complying with applicable safeguards concerning patient
protected health information, and
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permitting appropriate governmental authorities access to data
for their review.
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Records for clinical studies must be maintained for specific
periods for inspection by the FDA or other authorities during
audits. Non-compliance with the good clinical practices or
investigational new drug requirements can result in the
disqualification of data collected during the clinical trial. It
may also lead to debarment of an investigator or institution or
False Claims Act allegations if fraud or substantial
non-compliance is detected, and subject a hospital to a
recoupment of payments for services that are not covered by
federal healthcare programs. Finally, non-compliance could lead
to revocation or non-renewal of government research grants.
Failure to comply with new or revised applicable federal, state,
and international clinical trial laws existing laws and
regulations could subject us and physician investigators to loss
of the right to conduct research, civil fines, criminal
penalties, and other enforcement actions.
Finally, the Administrative Simplification Subtitle of HIPAA and
related privacy and security regulations also require healthcare
entities engaged in clinical research to maintain the privacy of
patient identifiable medical information. See
Privacy and Security Requirements.
We have implemented policies in an attempt to comply with
these rules as they apply to clinical research, including
procedures to obtain all required patient authorizations.
However, there is little or no guidance available as to how
these rules will be enforced.
Privacy
and Security Requirements
HIPAA requires the use of uniform electronic data transmission
standards for healthcare claims and payment transactions
submitted or received electronically. These provisions are
intended to encourage electronic commerce in the healthcare
industry. HHS has adopted final regulations establishing
electronic data transmission standards that all healthcare
providers must use when submitting or receiving certain
healthcare transactions electronically. We believe we have
complied in all material respects with these electronic data
transmission standards.
16
HHS has also adopted final regulations containing privacy
standards as required by HIPAA. The privacy regulations
extensively regulate the use and disclosure of individually
identifiable health-related information. We have taken measures
to comply with the final privacy regulations, but since there is
little guidance about how these regulations will be enforced by
the government, we cannot predict whether the government will
agree that our healthcare facilities are in compliance.
HHS has adopted final regulations regarding security standards.
These security regulations require healthcare providers to
implement organizational and technical practices to protect the
security of electronically maintained or transmitted
health-related information. We believe we have complied in all
material respects with these security standards.
In addition, our facilities continue to remain subject to state
laws that may be more restrictive than the regulations issued
under HIPAA. These statutes vary by state and could impose
additional penalties.
Compliance
Program
The OIG has issued guidelines to promote voluntarily developed
and implemented compliance programs for the healthcare industry.
In response to these guidelines, we adopted a code of ethics,
designated compliance officers at the parent company level and
individual hospitals, established a toll-free compliance line,
which permits anonymous reporting, implemented various
compliance training programs, and developed a process for
screening all employees through applicable federal and state
databases.
We have established a reporting system, auditing and monitoring
programs, and a disciplinary system to enforce the code of
ethics, and other compliance policies. Auditing and monitoring
activities include claims preparation and submission, and cover
numerous issues such as coding, billing, cost reporting, and
financial arrangements with physicians and other referral
sources. These areas are also the focus of training programs.
Our policy is to require our officers and all employees to
participate in compliance training programs. The board of
directors has established a compliance committee, which oversees
implementation of the compliance program. The committee consists
of three outside directors, and is chaired by Jacque Sokolov.
The compliance committee of the board meets at least quarterly.
The Chief Clinical and Compliance Officer reports to the chief
executive officer for
day-to-day
compliance matters and at least quarterly to the compliance
committee of the board. Each hospital has its own compliance
committee and compliance officer that reports to its governing
board. The compliance committee of the board of directors
assesses each hospitals compliance program at least
annually. The corporate compliance officer annually assesses the
hospitals for compliance reviews, provides an audit guide to the
hospitals to evaluate compliance with our policies and
procedures and serves on the compliance committee of each
hospital.
The objective of the program is to ensure that our operations at
all levels are conducted in compliance with applicable federal
and state laws regarding both public and private healthcare
programs.
You should carefully consider and evaluate all of the
information included in this report, including the risk factors
set forth below before making an investment decision with
respect to our securities. The following is not an exhaustive
discussion of all of the risks facing our company. Additional
risks not presently known to us or that we currently deem
immaterial may impair our business operations and results of
operations.
Our
efforts to enhance stockholder value may not be
successful.
On March 1, 2010, we announced that our Board of Directors
had formed a Strategic Options Committee to consider the sale of
either MedCath or the sale of our individual hospitals and other
assets. Since March 2010, we have announced the completion of
sales involving MedCaths interests in Arizona Heart
Hospital, Avera Heart Hospital of South Dakota, Heart Hospital
of Austin and the minority ownership interest our MedCath
Partners division held in Southwest Arizona Heart and Vascular,
LLC. We have also announced a definitive agreement to sell
17
substantially all of the assets of TexSan Heart Hospital, which
is expected to close during the fiscal quarter ending
March 31, 2011, subject to required approvals and customary
closing conditions.
We cannot assure you that our continuing efforts to enhance
stockholder value will succeed. The strategic alternatives
process is on-going and we continue to consider all practicable
alternatives, including the sale of MedCath, a sale of
MedCaths individual hospitals or other assets, or a
combination of these alternatives. There will be risks
associated with any alternative, including whether we will
obtain approvals that may be required in order to sell an
individual hospital or a sale or transaction involving the
entire company and the total proceeds received thereof.
Moreover, the timing and terms of any transaction will depend on
a variety of factors, some of which are beyond our control.
Until further progress is made in the strategic alternatives
process, we are unable to determine the approach that best meets
the interests of our stockholders and whether the approach we
select will be successful. A delay in or failure to complete one
or more transactions could have a material adverse effect on our
stock price and the amount of any potential distributions to our
stockholders.
We
cannot predict the timing, amount or mechanics of any potential
distributions to our stockholders.
We have begun to consider a number of scenarios for distributing
available cash to our stockholders such as special cash
dividends, distributions to stockholders following future sales
of individual hospitals or other assets or distributions in the
context of a dissolution. If MedCaths common equity is
sold in a merger or other similar transaction, stockholders
would receive consideration in exchange for their shares in
accordance with the terms of that transaction.
Although our Amended Credit Facility permits the payment of
dividends and the repurchase of our stock under certain
circumstances, we believe these circumstances are not achievable
at this time. Therefore, any dividend or stock repurchase can
only occur once the outstanding amount is repaid and the Amended
Credit Facility is terminated.
Many unknown variables will affect the amount, timing and
mechanics of any potential distributions to stockholders.
Factors that could have a material adverse effect on the amount
of any potential distributions include, but are not limited to,
a failure to obtain any required approvals, asset and corporate
wind-down related operating and other expenses, MedCaths
debt service obligations, tax treatment, inability to collect
amounts owed to MedCath and any required reserves to address
potential liabilities, including retained and contingent
liabilities of both MedCath and of its individual hospitals,
and/or other
unforeseen events. These and other factors, such as the
procedures established under Delaware law for the dissolution of
a Delaware corporation, could also delay the timing of any
potential distributions.
We may
have fiduciary duties to our partners that may prevent us from
acting solely in our best interests.
We hold our ownership interests in hospitals and other
healthcare businesses through ventures organized as limited
liability companies or limited partnerships. As general partner,
manager or owner of the majority interest in these entities, we
may have special legal responsibilities, known as fiduciary
duties, to our partners who own an interest in a particular
entity. Our fiduciary duties include not only a duty of care and
a duty of full disclosure but also a duty to act in good faith
at all times as manager or general partner of the limited
liability company or limited partnership. This duty of good
faith includes primarily an obligation to act in the best
interest of each business, without being influenced by any
conflict of interest we may have as a result of our own business
interests.
We also have a duty to operate our business for the benefit of
our stockholders. As a result, we may encounter conflicts
between our fiduciary duties to our partners in our hospitals
and other healthcare businesses, and our responsibility to our
stockholders. For example, we have entered into management
agreements to provide management services to our hospitals in
exchange for a fee. Disputes may arise with our partners as to
the nature of the services to be provided or the amount of the
fee to be paid. In these cases, as manager or general partner we
may be obligated to exercise reasonable, good faith judgment to
resolve the disputes and may not be free to act solely in our
own best interests or the interests of our stockholders. We
cannot assure you that any dispute between us and our partners
with respect to a particular business decision or regarding the
interpretation of the provisions of the hospital operating
agreement will be resolved or that, as a result of our fiduciary
duties, any dispute resolution will be on terms favorable or
satisfactory to us.
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Material
decisions regarding the operations or sale of our facilities
require consent of our physician and community hospital
partners, which may limit our ability to take actions that we
believe are in our best interest.
The physician and community hospital partners in our healthcare
businesses participate in material strategic and operating
decisions we make for these facilities, including those relating
to the disposition of assets or the hospital. They may do so
through their representatives on the governing board of the
subsidiary that owns the facility or a requirement in the
governing documents that we obtain the consent of their
representatives before taking specified material actions, such
as a sale of a hospital. We generally must obtain the consent of
our physician and other hospital partners or their
representatives before making any material amendments to the
operating or partnership agreement for the venture or admitting
additional members or partners. These rights to approve material
decisions could limit our ability to take actions that we
believe are in our best interest and the best interest of the
venture. We may not be able to resolve favorably, or at all, any
dispute regarding material decisions with our physician or other
hospital partners.
Unfavorable
or unexpected results at one of our hospitals or in one of our
markets could significantly impact our consolidated operating
results and the value received upon an asset
disposition.
Each of our individual hospitals comprise a significant portion
of our operating results and a majority of our hospitals are
located in the southwestern United States. Any material change
in the current demographic, economic, competitive or regulatory
conditions in this region, a particular market in which one of
our other hospitals operates or the United States in general
could adversely affect our operating results. In particular, if
economic conditions deteriorate in one or more of these markets,
we may experience a shift in payor mix arising from
patients loss of or changes in employer-provided health
insurance resulting in higher co-payments and deductibles or an
increased number of uninsured patients.
We may
continue to incur impairment losses on our long lived
assets
Long-lived assets of the Company are reviewed for impairment
annually and whenever events or changes in circumstances
indicate that their carrying value has become impaired. An
impairment loss would be recognized when the carrying amount of
an asset exceeds the estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual
disposition. The amount of the impairment loss to be recorded is
calculated by the excess of the assets carrying value over
its fair value. Fair value is generally determined by the
Company using a discounted cash flow analysis
and/or
independent third party market offers. Our strategic
alternatives process and operating results may provide
information in the future that may indicate additional
impairment of our long-lived assets.
If the
anti-kickback, physician self-referral or other fraud and abuse
laws are modified, interpreted differently or if other
regulatory restrictions become effective, we could incur
significant civil or criminal penalties and loss of
reimbursement or be required to revise or restructure aspects of
our business arrangements.
The federal anti-kickback statute prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return
for referring items or services payable by Medicare, Medicaid or
any other federal healthcare program. The anti-kickback statute
also prohibits any form of remuneration in return for
purchasing, leasing or ordering or arranging for or recommending
the purchasing, leasing or ordering of items or services payable
by these programs. The anti-kickback statute is very broad in
scope and many of its provisions have not been uniformly or
definitively interpreted by existing case law, regulations or
advisory opinions.
Violations of the anti-kickback statute may result in
substantial civil or criminal penalties, including criminal
fines of up to $25,000 for each violation or imprisonment and
civil penalties of up to $50,000 for each violation, plus three
times the amount claimed and exclusion from participation in the
Medicare, Medicaid and other federal healthcare reimbursement
programs. Any exclusion of our hospitals or diagnostic and
therapeutic facilities from these programs would result in
significant reductions in revenue and would have a material
adverse effect on our business.
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The requirements of the physician self-referral statute, or
Stark Law, are very complex and while federal regulations have
been issued to implement all of its provisions, proper
interpretation and application of the statute remains
challenging. The Stark Law prohibits a physician who has a
financial relationship with an entity from referring
Medicare or Medicaid patients to that entity for certain
designated health services. A financial
relationship includes a direct or indirect ownership or
investment interest in the entity, and a compensation
arrangement between the physician and the entity. Designated
health services include some radiology services and inpatient
and outpatient services.
There are various ownership and compensation arrangement
exceptions to this self-referral prohibition. Our hospitals rely
upon the whole hospital exception to allow referrals from
physician investors. Under this ownership exception, physicians
may make referrals to a hospital in which he or she has an
ownership interest if (1) the physician is authorized to
perform services at the hospital and (2) the ownership
interest is in the entire hospital, as opposed to a department
or a subdivision of the hospital. Another exception for
ownership of publicly traded securities permits physicians who
own shares of our common stock to make referrals to our
hospitals, provided our stockholders equity exceeded
$75.0 million at the end of our most recent fiscal year or
on average during the three previous fiscal years. This
exception applies if, prior to the time the physician makes a
referral for a designated health service to a hospital, the
physician acquired the securities on terms generally available
to the public and the securities are traded on one of the major
exchanges.
In July 2007 as part of proposed revisions to the Medicare
physician fee scheduled for fiscal year 2008, CMS proposed
certain additional changes to the Stark Law. In particular, the
proposed rule would revise the Stark Law exception for space and
equipment rentals. In instances where a physician leases space
or equipment to an entity who accepts patients referred by that
physician, the CMS proposal would no longer allow
unit-of-service
or per click payments for such leases. Additionally,
the proposed rule would no longer treat under
arrangements between hospitals and physician-owned
entities as compensation instead of ownership relationships.
Specifically, the proposal would revise the definition of
entity under the Stark Law to include not only the
entity billing for the service but also the entity that has
performed the designated health service CMS finalized these
proposed changes to the Stark Law in the 2009 IPPS final rule
published on August 19, 2008. These changes were effective
October 1, 2009. Specifically, the 2009 IPPS final rule
limits the ability of hospitals to enter into under arrangements
with physicians and physician-owned entities and thus,
physician-owned joint venture entities deemed to be
performing Designated Health Services (DHS) will
have to comply with one of the more limited Stark Law
ownership exceptions, rather than the previously
acceptable Stark Law compensation exceptions. In
addition, the 2009 IPPS final rule finalized the prohibition on
per unit compensation in space and equipment lease transactions.
We have restructured certain space and equipment lease
transactions with physicians that include per unit or per use
compensation effective October 1, 2009 as well certain
arrangements with community hospitals. We cannot yet predict the
full impact of this restructuring on our financial performance.
While we believe that such restructured arrangements comply with
applicable law, we cannot be assured, however, that government
officials will agree with our interpretation of applicable law.
The Health Care Reform Laws also made changes to the Stark Law,
effectively preventing new physician-owned hospitals after
March 23, 2010, and limiting the capacity and amount of
physician ownership in existing physician-owned hospitals. As
revised, the Stark law prohibits physicians from referring
Medicare patients to a hospital in which they have an ownership
or investment interest unless the hospital has physician
ownership and a Medicare provider agreement as of March 23,
2010 (or, for those hospitals under development, as of
December 31, 2010). A physician-owned hospital that meets
these requirements will still be subject to restrictions that
limit the hospitals aggregate physician ownership and,
with certain narrow exceptions for high Medicaid hospitals,
prohibit expansion of the number of operating rooms, procedure
rooms or beds. The legislation also subjects a physician-owned
hospital to reporting requirements and extensive disclosure
requirements on the hospitals website and in any public
advertisements. Possible further amendments to the Stark Law,
including any modification or revocation of the whole hospital
exception upon which we rely in establishing many of our
relationships with physicians, could require us to change or
adversely impact the manner in which we establish relationships
with physicians to develop and operate a facility, as well as
our other business relationships such as joint ventures and
physician practice management arrangements. There also can be no
assurance the CMS will not promulgate additional regulations
under the Stark Law that may change or adversely impact our
arrangements with referring physicians.
20
Reductions
or changes in reimbursement from government or third-party
payors could adversely impact our operating
results.
Historically, Congress and some state legislatures have, from
time to time, proposed significant changes in the healthcare
system, including the Health Care Reform Laws. Many of these
changes have resulted in limitations on, and in some cases,
significant reductions in the levels of, payments to healthcare
providers for services under many government reimbursement
programs. In addition, many payors, including Medicare and other
government payors, are increasingly developing payment policies
that result in more procedures being performed on an outpatient
basis rather than on an inpatient basis. Such policies will
result in decreased revenues for our hospitals, since outpatient
procedures are generally reimbursed at a lower rate than
inpatient procedures. Recent budget proposals, if enacted in
their current form, would freeze
and/or
reduce reimbursement for inpatient and outpatient hospital
services. The Medicare hospital inpatient prospective payment
system is evaluated on an annual basis. On August 22, 2007,
CMS issued its final inpatient hospital prospective payment
system rule for fiscal year 2008, which began October 1,
2007. The final rule continues major DRG reforms designed to
improve the accuracy of hospital payments. As introduced in the
fiscal year 2007 final rule, CMS will continue to use hospital
costs rather than charges to set payment rates. For fiscal year
2008, hospitals will be paid based upon a blend of
1/3
charge-based weights and
2/3
hospital cost-based weights for DRGs. Additionally, CMS adopted
its proposal to restructure the current 538 DRGs to 745 MS-DRGs
(severity-adjusted DRGs) to better recognize severity of patient
illness. These MS-DRGs were phased in over a two-year period.
Effective fiscal year 2009, CMS has identified eight conditions
that will not be paid at a higher rate unless they were present
on admission, including three serious preventable events deemed
never events. CMS published the inpatient
prospective payment system rule for 2009 on August 19,
2008. Due to the late enactment of the Medicare Improvements for
Patient and Providers Act (MIPPA), CMS did not
publish the final wage indices and payment rates for the 2009
IPPS final rule until October 2008. CMS issued the IPPS rule for
2010 on July 31, 2009. The Final IPPS rule for 2010
provides acute care hospitals with an inflation update of
2.1 percent in their 2010 payment rates. The Final IPPS
rule also adds four new measures for which hospitals must submit
data under the RHQDAPU program to receive the full market basket
update.
CMS published an amended IPPS for 2010 on May 21, 2010
which included a 0.25% market basket reduction and a related
reduction to the outlier threshold. The market basket adjustment
applies to discharges on or after April 1, 2010 and before
October 1, 2010.
CMS published the IPPS for 2011 on July 30, 2010, which
includes the following payment and policy changes effective for
discharges on or after October 1, 2010, the beginning of
the Companys fiscal 2011: a net inflation update of 2.35%;
a net increase of 1.25% for MS-DRG capital payments; an
additional reduction of 2.9% to the operating and capital rate
updates to recoup 50% of the estimated overpayments in 2008 and
2009 due to hospital coding and documentation processes in
connection with the transition to MS-DRGs; a decrease in the
cost outlier threshold from $23,135 to $23,075; and the addition
of 12 new quality measures to the RHQDAPU program set and the
retirement of one measure (10 of the new measures will be
considered in determining a hospitals 2012 update; the
remaining two measures to be reported in 2011 will be considered
in a hospitals 2013 update).
During the fiscal years ended September 30, 2010 and 2009,
we derived 55.5% and 54.3%, respectively, of our net revenue
from the Medicare and Medicaid programs. Changes in laws or
regulations governing the Medicare and Medicaid programs or
changes in the manner in which government agencies interpret
them could materially and adversely affect our operating results
or financial position.
Our relationships with third-party payors are generally governed
by negotiated agreements or out of network arrangements. These
agreements set forth the amounts we are entitled to receive for
our services. Third-party payors have undertaken
cost-containment initiatives during the past several years,
including different payment methods, monitoring healthcare
expenditures and anti-fraud initiatives such as audits and
recoupments, that have made these relationships more difficult
to establish and less profitable to maintain. We could be
adversely affected in some of the markets where we operate if we
are unable to establish favorable agreements with third-party
payors or satisfactory out of network arrangements or if
third-party payors elect to audit paid claims and recoup paid
amounts.
21
If we
fail to comply with the extensive laws and government
regulations applicable to us, we could suffer penalties or be
required to make significant changes to our
operations.
We are required to comply with extensive and complex laws and
regulations at the federal, state and local government levels.
These laws and regulations relate to, among other things:
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licensure, certification and accreditation,
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billing, coverage and reimbursement for supplies and services,
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relationships with physicians and other referral sources,
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adequacy and quality of medical care,
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quality of medical equipment and services,
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qualifications of medical and support personnel,
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confidentiality, maintenance and security issues associated with
medical records,
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the screening, stabilization and transfer of patients who have
emergency medical conditions,
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building codes,
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environmental protection,
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clinical research,
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operating policies and procedures, and
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addition of facilities and services.
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Many of these laws and regulations are expansive, and we do not
always have the benefit of significant regulatory or judicial
interpretation of them. In the future, different interpretations
or enforcement of these laws and regulations could subject our
current or past practices to allegations of impropriety or
illegality or could require us to make changes in our
facilities, equipment, personnel, services, capital expenditure
programs, operating procedures, and contractual arrangements.
If we fail to comply with applicable laws and regulations, we
could be subjected to liabilities, including:
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criminal penalties,
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civil penalties, including monetary penalties and the loss of
our licenses to operate one or more of our facilities, and
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exclusion of one or more of our facilities from participation in
the Medicare, Medicaid and other federal and state healthcare
programs.
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Current or future legislative initiatives, government
regulations or other government actions may have a material
adverse effect on us.
Companies
within the healthcare industry continue to be the subject of
federal and state investigations.
Both federal and state government agencies as well as private
payors have heightened and coordinated civil and criminal
enforcement efforts as part of numerous ongoing investigations
of healthcare organizations including hospital companies. Like
others in the healthcare industry, we receive requests for
information from these governmental agencies in connection with
their regulatory or investigative authority which, if determined
adversely to us, could have a material adverse effect on our
financial condition or our results of operations.
In addition, the Office of Inspector General and the
U.S. Department of Justice have, from time to time,
undertaken national enforcement initiatives that focus on
specific billing practices or other suspected areas of abuse.
Moreover, healthcare providers are subject to civil and criminal
false claims laws, including the federal False Claims Act, which
allows private parties to bring what are called whistleblower
lawsuits against private companies
22
doing business with or receiving reimbursement under government
programs. These are sometimes referred to as qui tam
lawsuits.
Because qui tam lawsuits are filed under seal, we could be named
in one or more such lawsuits of which we are not aware or which
cannot be disclosed until the court lifts the seal from the
case. Defendants determined to be liable under the False Claims
Act may be required to pay three times the actual damages
sustained by the government, plus mandatory civil penalties of
between $5,500 and $11,000 for each separate false claim.
Typically, each fraudulent bill submitted by a provider is
considered a separate false claim, and thus the penalties under
a false claim case may be substantial. Liability arises when an
entity knowingly submits a false claim for reimbursement to a
federal healthcare program. In some cases, whistleblowers or the
federal government have taken the position that providers who
allegedly have violated other statutes, such as the
anti-kickback statute or the Stark Law, have thereby submitted
false claims under the False Claims Act. Thus, it is possible
that we have liability exposure under the False Claims Act.
Some states have adopted similar state whistleblower and false
claims provisions. Publicity associated with the substantial
amounts paid by other healthcare providers to settle these
lawsuits may encourage current and former employees of ours and
other healthcare providers to seek to bring more whistleblower
lawsuits. Some of our activities could become the subject of
governmental investigations or inquiries. Any such
investigations of us, our executives or managers could result in
significant liabilities or penalties to us, as well as adverse
publicity.
In October 2007, we reached an agreement with the DOJ and the
United States Attorneys Office in Phoenix, Arizona
regarding clinical trials at the Arizona Heart Hospital, one of
the eight hospitals in which we owned an interest. The
settlement concerns Medicare claims submitted between June 1998
and October 2002 for physician services involving the
implantation of certain endoluminal graft devices (utilized to
treat aneurysms) that had not received final marketing approval
from the FDA, and allegedly were either implanted without an
approved investigational device exception (IDE) or
were implanted outside of the approved IDE protocol. The DOJ
allegations did not involve patient care and related solely to
whether the procedures were properly reimbursable by Medicare.
The parties reached a settlement of the allegations to avoid the
delay, uncertainty, inconvenience, and expense of protracted
litigation. Further, the hospital denies engagement in any
wrongdoing or illegal conduct, and the settlement agreement does
not contain any admission of liability. As disclosed in previous
filings, the hospital agreed to pay approximately
$5.8 million to settle and obtain a release from any civil
or administrative monetary claims related to the DOJs
investigation. Additionally, the hospital has entered into a
five-year corporate integrity agreement with the OIG under which
the hospital will continue to maintain its existing corporate
compliance program and which relates to clinical trials
conducted at the hospital. The $5.8 million was paid to the
United States in November 2007.
During fiscal years 2008 and 2007 we refunded certain
reimbursements to CMS related to carotid artery stent procedures
performed during prior fiscal years at two of the Companys
consolidated subsidiary hospitals. The DOJ initiated an
investigation related to our return of these reimbursements. As
a result of the DOJs investigation, the Company began
negotiating settlement agreements during the second quarter of
fiscal 2009 with the DOJ whereby we are expected to pay
approximately $0.8 million to settle and obtain releases
from any federal civil false claims liability related to the
DOJs investigation. The DOJ allegations do not involve
patient care, and relate solely to whether the procedures were
properly reimbursable by Medicare. The settlement does not
include any finding of wrong-doing or any admission of
liability. As of September 30, 2010, both settlement
agreements have been executed and we have paid the United States
$0.8 million related to this matter.
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. We
have complied with all information requested by the DOJ for this
hospital. Because we are in the early stages of this
investigation, we are unable to evaluate the outcome of this
investigation.
In September 2010, we received a letter from the DOJ advising us
of an investigation that will assess whether certain of our
other hospitals have submitted ICD claims excluded from Medicare
coverage. As a
follow-up to
its letter, the DOJ has provided us with additional information
regarding claims which potentially may be excluded from
coverage. We understand that the DOJ has delivered similar CIDs
and letters to many other hospitals and
23
hospital systems across the country as well as to the ICD
manufacturers themselves. We are fully cooperating and have
entered into a tolling agreement with the government in this
investigation. Our revenue arising from ICD procedures is
material. However, to date, the DOJ has not asserted any claims
against any of our hospitals. Because we are in the early stages
of this investigation, we are unable to evaluate the outcome of
this investigation.
Future
audits by Recovery Audit Contractors (RAC) could
have a material adverse effect on our reported financial
results.
In 2005, the CMS began using RACs to detect Medicare
overpayments not identified through existing claims review
mechanisms. The RAC program relies on private auditing firms to
examine Medicare claims filed by healthcare providers and fees
are paid to the RACs on a contingency basis.
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. The 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 expand the RAC programs scope
to include Medicaid claims by requiring all states to enter into
contracts with RACs by December 31, 2010.
Even though we believe the claims for reimbursement submitted to
the Medicare and Medicaid program by our facilities have been
accurate, we are unable to reasonably estimate what the
potential result of future RAC audits or other reimbursement
matters could be.
Audits
by Third-party Payors could also have a material adverse effect
on our reported financial results.
Third-party payors have the right in some cases under contract
to conduct post payment audits in order to detect potential
overpayments. While we believe that our claims submitted to
these third-party payors are in compliance with our contractual
arrangements, we are unable to predict whether such payors will
identify overpayments and seek to recover such payments and if
so, what the potential results would be.
If
government laws or regulations change or the enforcement or
interpretation of them change, we may be obligated to purchase
some or all of the ownership interests of the physicians
associated with us.
Changes in government regulation or changes in the enforcement
or interpretation of existing laws or regulations could obligate
us to purchase at the then fair market value some or all of the
ownership interests of the physicians who have invested in the
ventures that own and operate our hospitals and other healthcare
businesses. Regulatory changes that could create this obligation
include changes that:
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make illegal the referral of Medicare or other patients to our
hospitals and other healthcare businesses by physicians
affiliated with us,
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create the substantial likelihood that cash distributions from
the hospitals and other healthcare businesses to our physician
partners will be illegal, or
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make illegal the ownership by our physician partners of their
interests in the hospitals and other healthcare businesses.
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From time to time, we may voluntarily seek to increase our
ownership interest in one or more of our hospitals and other
healthcare businesses, in accordance with any applicable
limitations. We may seek to use shares of our common stock to
purchase physicians ownership interests instead of cash.
If the use of our stock is not permitted or attractive to us or
our physician partners, we may use cash or promissory notes to
purchase the physicians ownership interests. Our existing
capital resources may not be sufficient for the acquisition or
the use of cash may limit our ability to use our capital
resources elsewhere, limiting our growth and impairing our
operations. The creation of these obligations and the possible
adverse effect on our affiliation with these physicians could
have a material adverse effect on us.
24
Growth
of self-pay patients and a deterioration in the collectability
of these accounts could adversely affect our results of
operations.
We have experienced growth in our self-pay patients, which
includes situations in which each patient is responsible for the
entire bill, as well as cases where deductibles are due from
insured patients after insurance pays. We may have greater
amounts of uninsured receivables in the future and if the
collectability of those uninsured receivables deteriorates,
increases in our allowance for doubtful accounts may be
required, which could materially adversely impact our operating
results and financial condition.
Our
hospitals and other facilities face competition for patients
from other healthcare companies.
The healthcare industry is highly competitive. Our facilities
face competition for patients from other providers in our
markets. In most of our markets we compete for market share of
cardiovascular and other healthcare procedures that are the
focus of our facilities with two to three providers. As we
expand the scope of hospital services at our hospitals we may
face even greater levels of competition from other larger
general acute care hospitals in our markets that also provide
those services. Some of these providers are part of large
for-profit or
not-for-profit
hospital systems with greater financial resources than we have
available to us and have been operating in the markets they
serve for many years. Some of the hospitals that we compete
against in certain of our markets and elsewhere have attempted
to use their market position and managed care networks to
influence physicians not to enter into or to abandon joint
ventures that own facilities such as ours by, for example,
revoking the admission privileges of our physician partners at
the competing hospital. These practices of economic
credentialing appear to be on the increase. Although these
practices have not been successful to date in either preventing
us from developing new ventures with physicians or causing us to
lose existing investors, the future inability to attract new
investors or loss of a significant number of our physician
partners in one or more of our existing ventures could have a
material adverse effect on our business and operating results.
We
depend on our relationships with the physicians who use our
facilities.
A hospital system with which one of our established hospitals
competes recently announced a collaboration with one of the
leading cardiac services physician groups in that market, some
of whose physicians have historically used our hospital and are
investors in that hospital. It is possible that similiar
collaboration at our other hospitals could result in a decrease
in the use of our hospitals by physicians, with a resulting
decrease in the revenue and financial performance of our
hospitals.
Our business depends upon the efforts and success of the
physicians who provide healthcare services at our facilities and
the strength of our relationships with these physicians. Each
member of the medical staffs at our hospitals may also serve on
the medical staffs of, and practice at, hospitals not owned by
us.
At each of our hospitals, our business could be adversely
affected if a significant number of key physicians or a group of
physicians:
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terminated their relationship with, or reduced their use of, our
facilities,
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failed to maintain the quality of care provided or to otherwise
adhere to the legal professional standards or the legal
requirements to obtain privileges at our hospitals or other
facilities,
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suffered any damage to their reputation,
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exited the market entirely,
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experienced financial issues within their medical practice or
other major changes in its composition or leadership, or
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align with another healthcare provider resulting in significant
reduction in use of our facilities.
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Historically, the medical staff at each hospital ranges from
approximately 100 to 400 physicians depending upon the size of
the hospital and the number of practicing physicians in the
market. If we fail to maintain our relationships with the
physicians in this group at a particular hospital, many of whom
are investors in our hospitals, the revenues of that hospital
would be reduced. None of the physicians practicing at our
hospitals has a legal
25
commitment, or any other obligation or arrangement that requires
the physician to refer patients to any of our hospitals or other
facilities.
From time to time physicians who are leaders of their medical
groups and who use our hospitals may retire or otherwise cease
practicing medicine or using our facilities for a variety of
reasons. Those medical groups may not replace those physician
leaders or may replace them with physicians who choose not to
use our hospitals. Losing the utilization of our hospitals by
those physicians and other physicians in their medical groups
may result in material decreases in our revenue and financial
performance.
A
shortage of qualified nurses could affect our ability to grow
and deliver quality, cost-effective care services.
We depend on qualified nurses to provide quality service to
patients in our facilities. There is currently a shortage of
qualified nurses in certain markets where we operate our
facilities. This shortage of qualified nurses and the more
stressful working conditions it creates for those remaining in
the profession are increasingly viewed as a threat to patient
safety and may trigger the adoption of state and federal laws
and regulations intended to reduce that risk. For example, some
states have adopted or are considering legislation that would
prohibit forced overtime for nurses
and/or
establish mandatory staffing level requirements. Growing numbers
of nurses are also joining unions that threaten and sometimes
call work stoppages.
In response to the shortage of qualified nurses, we have
increased and are likely to have to continue to increase our
wages and benefits to recruit and retain nurses or to engage
expensive contract nurses until we hire permanent staff nurses.
We may not be able to increase the rates we charge to offset
increased costs. The shortage of qualified nurses has in the
past and may in the future delay our ability to achieve our
operational goals at a hospital by limiting the number of
patient beds available during the
start-up
phase of the hospital. The shortage of nurses also makes it
difficult for us in some markets to reduce personnel expense at
our facilities by implementing a reduction in the size of the
nursing staff during periods of reduced patient admissions and
procedure volumes.
We
rely heavily on our information systems and if our access to
this technology is impaired or interrupted, or if such
technology does not perform as warranted by the vendor, our
business could be harmed and we may not comply with applicable
laws and regulations.
Increasingly, our business depends in large part upon our
ability to store, retrieve, process and manage substantial
amounts of information. To achieve our strategic objectives and
to remain in compliance with various regulations, we must
continue to develop and enhance our information systems, which
may require the acquisition of equipment and third-party
software. Our inability to implement and utilize, in a
cost-effective manner, information systems that provide the
capabilities necessary for us to operate effectively, or any
interruption or loss of our information processing capabilities,
for any reason including if such systems, or systems acquired in
the future, do not perform appropriately, could harm our
business, results of operations or financial condition.
Uninsured
risks from legal actions related to professional liability could
adversely affect our cash flow and operating
results.
In recent years, physicians, hospitals, diagnostic centers and
other healthcare providers have become subject, in the normal
course of business, to an increasing number of legal actions
alleging negligence in performing services, negligence in
allowing unqualified physicians to perform services or other
legal theories as a basis for liability. Many of these actions
involve large monetary claims and significant defense costs. We
may be subject to such legal actions even though a particular
physician at one of our hospitals or other facilities is not our
employee and the governing documents for the medical staffs of
each of our hospitals require physicians who provide services,
or conduct procedures, at our hospitals to meet all licensing
and specialty credentialing requirements and to maintain their
own professional liability insurance.
We have established a reserve for malpractice claims based on
actuarial estimates using our historical experience with
malpractice claims and assumptions about future events. Due to
the considerable variability that is inherent in such estimates,
including such factors as changes in medical costs and changes
in actual experience, there is a reasonable possibility that the
recorded estimates will change by a material amount in the near
term. Also,
26
there can be no assurance that the ultimate liability we
experience under our self-insured retention for medical
malpractice claims will not exceed our estimates. It is also
possible that such claims could exceed the scope of coverage, or
that coverage could be denied.
Our
results of operations may be adversely affected from time to
time by changes in treatment practice and new medical
technologies.
One major element of our business model is to focus on the
treatment of patients suffering from cardiovascular disease. Our
commitment and that of our physician partners to treating
cardiovascular disease often requires us to purchase newly
approved pharmaceuticals and devices that have been developed by
pharmaceutical and device manufacturers to treat cardiovascular
disease. At times, these new technologies receive required
regulatory approval and become widely available to the
healthcare market prior to becoming eligible for reimbursement
by government and other payors. In addition, the clinical
application of existing technologies may expand, resulting in
their increased utilization. We cannot predict when new
technologies will be available to the marketplace, the rate of
acceptance of the new technologies by physicians who practice at
our facilities, and when or if, government and third-party
payors will provide adequate reimbursement to compensate us for
all or some of the additional cost required to purchase new
technologies. As such, our results of operations may be
adversely affected from time to time by the additional,
unreimbursed cost of these new technologies.
In addition, advances in alternative cardiovascular treatments
or in cardiovascular disease prevention techniques could reduce
demand or eliminate the need for some of the services provided
at our facilities, which could adversely affect our results of
operations. Further, certain technologies may require
significant capital investments or render existing capital
obsolete which may adversely impact our cash flows or operations.
California
state law could have a material adverse impact on our financial
results or cause significant changes to our existing approach to
control of patient medical information.
Effective January 1, 2009, California licensed general
acute hospitals are subject to increased administrative
penalties associated with survey deficiencies impacting the
health or safety of a patient, the unlawful or unauthorized
access, use, or disclosure of a patients medical
information and are required to screen specific patients for
certain hospital-related infections and must maintain an
infection control policy. Deficiencies constituting immediate
jeopardy to the health or safety of a patient are subject to
graduated penalties of up to a maximum $100,000 per violation
(up from a maximum of $25,000 per violation). Deficiencies not
constituting immediate jeopardy to the health or safety of a
patient are subject to penalties up to a maximum of $25,000 per
violation (up from a maximum of $17,500 per violation).
Penalties for violation of the unlawful or unauthorized access
are up to $25,000 per patient and a maximum of $17,500 for each
subsequent access, use or disclosure of the patients
medical information.
We believe we are in compliance with this new California
provisions, but there can be no assurance that applicable
regulatory agencies or individuals may challenge that assertion.
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.
A purported class action law suit was recently filed by an
individual against the Bakersfield Heart Hospital. 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 that
California prohibits the practice of balance billing
patients who are provided emergency services as
defined under California law. On November 24, 2010, the
court granted the Bakersfield Heart Hospitals motion to
strike plantiffs class allegations.
27
Texas
state law may adversely impact our results of operations by
causing reductions in our reimbursements under the Medicaid
program administered by the Texas Health and Human Services
Commission.
The Texas Health and Human Services Commission is in the process
of rebasing the Medicaid Standard Dollar Amount
(SDA) rates for all Texas acute care hospitals. The
rebased SDA rates will be implemented for admissions occurring
on or after November 1, 2010. The state released
preliminary data in May 2010 with a deadline of June 21,
2010 for hospitals to request a review. Based on comments
received from hospitals, the state has implemented a
10/38 plan for the state fiscal year that began
September 1, 2010 under which decreases in individual
hospital reimbursement levels will be capped at 10% and
increases will be capped at 38%. We estimate that the rebasing
will decrease net revenues for our continuing operations in
Texas by $0.1 million in the fiscal 2011. The state intends
to eliminate the 10/38 plan for the state fiscal
year beginning September 1, 2011. The impact on future
years may be material to our net revenues due to the elimination
of the caps starting in our fiscal 2012.
If
laws governing the corporate practice of medicine change, we may
be required to restructure some of our
relationships.
The laws of various states in which we operate or may operate in
the future do not permit business corporations to practice
medicine, exercise control over physicians who practice medicine
or engage in various business practices, such as fee-splitting
with physicians. The interpretation and enforcement of these
laws vary significantly from state to state. We are not required
to obtain a license to practice medicine in any jurisdiction in
which we own or operate a hospital or other facility because our
facilities are not engaged in the practice of medicine. The
physicians who use our facilities to provide care to their
patients are individually licensed to practice medicine. In most
instances, the physicians and physician group practices are not
affiliated with us other than through the physicians
ownership interests in the facility or other joint ventures and
through the service and lease agreements we have with some of
these physicians. Should the interpretation, enforcement or laws
of the states in which we operate or may operate change, we
cannot assure you that such changes would not require us to
restructure some of our physician relationships.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our executive offices are located in Charlotte, North Carolina
in approximately 32,580 square feet of leased commercial
office space.
Each of the ventures we have formed to develop a hospital owns
the land and buildings of the hospital, with the exception of
the land underlying the Heart Hospital of Austin and the land
and building at Harlingen Medical Center (a minority owned
hospital), which are leased. As previously noted, the Company
disposed of its interest in the Heart Hospital of Austin on
November 1, 2010. Each hospital has pledged its interest in
the land and hospital building to secure the long-term debt
incurred to develop the hospital, and substantially all the
equipment located at these hospitals is pledged as collateral to
secure long-term debt. Each entity formed to own and operate a
diagnostic and therapeutic facility leases its facility.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various litigation and proceedings in the
ordinary course of our business. We do not believe, based on our
experience with past litigation, and taking into account our
applicable insurance coverage and the expectations of counsel
with respect to the amount of our potential liability, the
outcome of any such known litigation, individually or in the
aggregate, will have a material adverse effect upon our
business, financial condition or results of operations.
28
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock trades on the Nasdaq Global
Market®
under the symbol MDTH. At December 10, 2010,
there were 20,469,305 shares of common stock outstanding,
the sale price of our common stock per share was $13.60, and
there were 63 holders of record. The following table sets forth,
for the periods indicated, the high and low sale prices per
share of our common stock as reported by the Nasdaq Global
Market
®:
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2010
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
9.99
|
|
|
$
|
6.69
|
|
Second Quarter
|
|
|
12.94
|
|
|
|
6.62
|
|
Third Quarter
|
|
|
11.20
|
|
|
|
7.75
|
|
Fourth Quarter
|
|
|
10.24
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2009
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
18.28
|
|
|
$
|
5.89
|
|
Second Quarter
|
|
|
10.47
|
|
|
|
5.70
|
|
Third Quarter
|
|
|
12.86
|
|
|
|
7.02
|
|
Fourth Quarter
|
|
|
13.63
|
|
|
|
8.43
|
|
Although our Amended Credit Facility permits the payment of
dividends and the repurchase of our stock under certain
circumstances, we believe these circumstances are not achievable
at this time. Therefore, any dividend or stock repurchase can
only occur once the outstanding amount is repaid and the Amended
Credit Facility is terminated. See Note 9 to our
consolidated financial statements contained elsewhere in this
report.
During August 2007, our board of directors approved a stock
repurchase program of up to $59.0 million. Since the
Boards approval of the stock repurchase program, the
Company has repurchased 1,885,461 shares of common stock at
a total cost of $44.4 million, with a remaining
$14.6 million available to be repurchased under the
approved stock repurchase program. No shares were repurchased
during fiscal 2010.
29
The following graph illustrates, for the period from
September 30, 2005 through September 30, 2010, the
cumulative total shareholder return of $100 invested (assuming
that all dividends, if any, were reinvested) in (1) our
common stock, (2) the NASDAQ Composite Stock Index and
(3) the S&P Health Care Facilities Index.
The comparisons in this table are required by the rules of the
Securities and Exchange Commission and, therefore, are not
intended to forecast or be indicative of possible future
performance of our common stock.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among MedCath Corporation, The NASDAQ Composite Index
And The S&P Health Care Facilities Index
|
|
* |
$100 invested on
9/30/05 in
stock or index, including reinvestment of dividends. Fiscal year
ending September 30.
|
Copyright
©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
30
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data have been derived from
our audited consolidated financial statements. The selected
consolidated financial data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our
consolidated financial statements and related notes, appearing
elsewhere in this report.
The following table sets forth our selected consolidated
financial data as of and for the years ended September 30,
2010, 2009, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
442,496
|
|
|
$
|
419,733
|
|
|
$
|
414,155
|
|
|
$
|
474,290
|
|
|
$
|
444,841
|
|
Impairment of long-lived assets and goodwill
|
|
$
|
66,822
|
|
|
$
|
51,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
458
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(67,672
|
)
|
|
$
|
(42,644
|
)
|
|
$
|
32,140
|
|
|
$
|
32,307
|
|
|
$
|
(377
|
)
|
(Loss) income from continuing operations, net of taxes
|
|
$
|
(51,956
|
)
|
|
$
|
(51,655
|
)
|
|
$
|
10,645
|
|
|
$
|
10,983
|
|
|
$
|
(7,579
|
)
|
Income from discontinued operations, net of taxes
|
|
$
|
3,585
|
|
|
$
|
1,373
|
|
|
$
|
10,345
|
|
|
$
|
544
|
|
|
$
|
20,155
|
|
Net (loss) income
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
$
|
11,527
|
|
|
$
|
12,576
|
|
(Loss) earnings from continuing operations attributable to
MedCath Corporation common stockholders per share, basic
|
|
$
|
(2.62
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
(0.41
|
)
|
(Loss) earnings from continuing operations attributable to
MedCath Corporation common stockholders per share, diluted
|
|
$
|
(2.62
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
0.53
|
|
|
$
|
0.51
|
|
|
$
|
(0.39
|
)
|
(Loss) earnings per share, basic
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.05
|
|
|
$
|
0.56
|
|
|
$
|
0.67
|
|
(Loss) earnings per share, diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.04
|
|
|
$
|
0.54
|
|
|
$
|
0.64
|
|
Weighted average number of shares, basic(a)
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
19,996
|
|
|
|
20,872
|
|
|
|
18,656
|
|
Weighted average number of shares, diluted(a)
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
20,069
|
|
|
|
21,511
|
|
|
|
19,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet and Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
494,538
|
|
|
$
|
590,448
|
|
|
$
|
653,456
|
|
|
$
|
678,567
|
|
|
$
|
785,849
|
|
Total long-term obligations
|
|
$
|
99,841
|
|
|
$
|
115,231
|
|
|
$
|
121,989
|
|
|
$
|
148,484
|
|
|
$
|
286,928
|
|
Net cash provided by operating activities
|
|
$
|
43,294
|
|
|
$
|
63,633
|
|
|
$
|
52,008
|
|
|
$
|
58,225
|
|
|
$
|
65,634
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(16,956
|
)
|
|
$
|
(63,790
|
)
|
|
$
|
(5,805
|
)
|
|
$
|
(28,591
|
)
|
|
$
|
10,064
|
|
Net cash used in financing activities
|
|
$
|
(41,009
|
)
|
|
$
|
(50,210
|
)
|
|
$
|
(78,028
|
)
|
|
$
|
(80,116
|
)
|
|
$
|
(22,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data (consolidated)(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
6
|
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
|
|
6
|
|
Licensed beds(c)
|
|
|
541
|
|
|
|
471
|
|
|
|
392
|
|
|
|
304
|
|
|
|
416
|
|
Staffed and available beds(d)
|
|
|
455
|
|
|
|
385
|
|
|
|
347
|
|
|
|
287
|
|
|
|
399
|
|
Admissions(e)
|
|
|
22,010
|
|
|
|
19,894
|
|
|
|
20,962
|
|
|
|
26,497
|
|
|
|
27,482
|
|
Adjusted admissions(f)
|
|
|
32,567
|
|
|
|
28,692
|
|
|
|
28,337
|
|
|
|
36,311
|
|
|
|
37,061
|
|
Patient days(g)
|
|
|
82,105
|
|
|
|
75,817
|
|
|
|
75,185
|
|
|
|
89,100
|
|
|
|
91,420
|
|
Adjusted patient days(h)
|
|
|
121,940
|
|
|
|
109,281
|
|
|
|
101,383
|
|
|
|
121,689
|
|
|
|
123,229
|
|
Average length of stay(i)
|
|
|
3.73
|
|
|
|
3.81
|
|
|
|
3.59
|
|
|
|
3.36
|
|
|
|
3.33
|
|
Occupancy(j)
|
|
|
49.4
|
%
|
|
|
54.0
|
%
|
|
|
59.4
|
%
|
|
|
85.1
|
%
|
|
|
62.8
|
%
|
Inpatient catheterization procedures(k)
|
|
|
10,219
|
|
|
|
10,167
|
|
|
|
11,922
|
|
|
|
13,418
|
|
|
|
13,151
|
|
Inpatient surgical procedures(l)
|
|
|
5,234
|
|
|
|
5,064
|
|
|
|
4,732
|
|
|
|
5,978
|
|
|
|
6,042
|
|
Hospital net revenue
|
|
$
|
428,122
|
|
|
$
|
400,170
|
|
|
$
|
392,775
|
|
|
$
|
449,835
|
|
|
$
|
418,039
|
|
|
|
|
(a) |
|
See Note 15 to the consolidated financial statements
included elsewhere in this report. |
|
(b) |
|
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 were accounted
for using the equity method or as discontinued operations in our
consolidated financial statements. During the fourth quarter of
fiscal 2007, |
31
|
|
|
|
|
Harlingen Medical Center ceased to be a consolidated subsidiary
due to the sale of a portion of our interests in the hospital. |
|
(c) |
|
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. |
|
(d) |
|
Staffed and available beds represent the number of beds that are
readily available for patient use at the end of the period. |
|
(e) |
|
Admissions represent the number of patients admitted for
inpatient treatment. |
|
(f) |
|
Adjusted admissions is a general measure of combined inpatient
and outpatient volume. We computed adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and
then multiplying the quotient by admissions. |
|
(g) |
|
Patient days represent the total number of days of care provided
to inpatients. |
|
(h) |
|
Adjusted patient days is a general measure of combined inpatient
and outpatient volume. We computed adjusted patient days by
dividing gross patient revenue by gross inpatient revenue and
then multiplying the quotient by patient days. |
|
(i) |
|
Average length of stay (days) represents the average number of
days inpatients stay in our hospitals. |
|
(j) |
|
We computed 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. |
|
(k) |
|
Inpatients with a catheterization procedure represent the number
of inpatients with a procedure performed in one of the
hospitals catheterization labs during the period. |
|
(l) |
|
Inpatient surgical procedures represent the number of surgical
procedures performed on inpatients during the period. |
|
|
Item 7.
|
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 consolidated financial statements and
related notes included elsewhere in this report.
Overview
We were incorporated as Medcath Corporation in Delaware in 2001
as a healthcare provider and are 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. We opened our first
hospital in 1996 and as of September 30, 2010, had
ownership interests in and operated ten hospitals, including
eight in which we owned a majority interest.
As noted below, we sold two of our majority owned hospitals that
were classified as discontinued operations as of
September 30, 2010 and our equity interest in one of our
minority owned hospitals. As a result, we currently own
interests in seven hospitals. In addition, we have an agreement
to sell one of the seven remaining hospitals. 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.
During May 2009 we completed our 79 licensed bed expansion at
Louisiana Medical Center and Heart Hospital (LMCHH)
and built space for an additional 40 beds at that hospital.
During October 2009, we opened a new acute care hospital,
Hualapai Mountain Medical Center (HMMC), in Kingman,
Arizona. This hospital is designed to accommodate a total of 106
licensed beds, with an initial opening of 70 of its licensed
beds. The hospitals in which we had an ownership interest as of
September 30, 2010 had a total of 825 licensed beds, 117 of
which are related to Arizona Heart Hospital (AzHH)
and Heart Hospital of Austin (HHA) whose assets,
liabilities, and operations are included within discontinued
operations. AzHH and HHA were sold on October 1, 2010 and
November 1, 2010, respectively. Our seven hospitals that
currently comprise our continuing operations have 653 licensed
beds and are located in six states: Arizona, Arkansas,
California, Louisiana, New Mexico, and Texas.
32
In addition to our hospitals, we currently own
and/or
manage eight cardiac diagnostic and therapeutic facilities.
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. We refer to
our diagnostics division as MedCath Partners.
Pursuant to a settlement (Settlement Agreement) that
we entered into on August 14, 1995 with the State of North
Carolina Department of Human Resources (now known as the
Division of Health Service Regulation (DHSR)), we
obtained authority to operate nine cardiac catheterization
laboratories anywhere in the state of North Carolina without
obtaining a CON. The rights under the Settlement Agreement were
subsequently assigned to MedCath Partners in connection with a
reorganization by us. MedCath Partners is required to comply
with certain notice requirements for replacement of any
equipment comprising these labs and has historically notified
the DHSR when MedCath Partners is changing the location of any
labs located within the State. However, the DHSR takes the
position that MedCath Partners must own and provide the services
of the equipment which comprises each lab the CON
exemption applies only when MedCath Partners is operating one of
these specific nine labs. For financial data and other
information of this and other segments of our business see
Note 20 to our audited consolidated financial statements in
this report on
Form 10-K
for financial information by segment.
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 (Phoenix, Arizona) in
which we 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. We anticipate that we will receive final
net proceeds of approximately $31.5 million from the
transaction after payment of retained known liabilities, payment
of taxes related to the transaction and collection of the
hospitals accounts receivable. The $31.5 million in
estimated net proceeds is prior to reserves, if any, required in
managements judgment to address any potential contingent
liabilities.
|
|
|
|
The disposition of our wholly owned subsidiary that held 33.3%
ownership of Avera Heart Hospital of South Dakota located in
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. We estimate that
we will receive final net proceeds from the transaction of
approximately $16.0 million, after closing costs and
payment of estimated taxes related to the transaction and prior
to reserves, if any, required in managements judgment to
address any potential contingent liabilities.
|
|
|
|
The disposition of Heart Hospital of Austin (Texas) in which we
and our 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. We anticipate that it will
receive final net proceeds of approximately $24.1 million
from the transaction after repayment of third party debt and a
related prepayment fee, payment of all known retained
liabilities of the partnership, payment of taxes related to the
transaction, collection of the partnerships accounts receivable,
and distributions to the hospitals minority partners. The
$24.1 million in estimated net proceeds is prior to
reserves, if any, required in managements judgment to
address any potential contingent liabilities.
|
|
|
|
The disposition of our 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.
We estimate that final net proceeds from the transaction will
total approximately $6.9 million, after closing costs and
income tax benefit related to a tax loss on the transaction, but
prior to reserves, if any, required in managements
judgment to address any potential contingent liabilities.
|
In addition, we announced on November 8, 2010, that we,
along with physician partners, had entered into a definitive
agreement to sell substantially all the assets of
TexSan Heart Hospital (San Antonio, Texas) to
Methodist Healthcare System of San Antonio for
$76.25 million, plus retained working capital. The
transaction, which is subject to regulatory approval and other
customary closing conditions, is anticipated to close during our
second
33
quarter of fiscal 2011, which ends March 31, 2011. We
anticipate that we will receive approximately $58.0 million
from the transaction after payment of all retained known
liabilities of the partnership, payment of taxes related to the
transaction, collection of the partnerships accounts
receivable, and distributions to the hospitals minority
partners. The $58.0 million in estimated net proceeds is
prior to reserves, if any, required in managements
judgment to address any potential contingent liabilities.
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 alternatives process is on-going and expected to
continue during our 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, in the context of a
dissolution and following repayment of all bank debt and
termination of our credit facility. 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.
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 alternative
process, we are unable to determine the approach that best meets
the interests of our stockholders. Final amounts available to
stockholders could 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, any required reserves to address liabilities,
including retained and contingent liabilities
and/or other
unforeseen events.
Basis of Consolidation. We have included in
our consolidated financial statements hospitals and cardiac
diagnostic and therapeutic facilities over which we exercise
substantive control, including all entities in which we own more
than a 50% interest, as well as variable interest entities in
which we are the primary beneficiary. We have used the equity
method of accounting for entities, including variable interest
entities, in which we hold less than a 50% interest and over
which we do not exercise substantive control, and are not the
primary beneficiary. Accordingly, the hospitals in which we hold
a minority interest are excluded from the net revenue and
operating results of our consolidated company and our
consolidated hospital division. During the fourth quarter of
fiscal 2007, we sold a portion of our equity interest in
Harlingen Medical Center; therefore, beginning in July 2007, we
began excluding this hospital from net revenue and operating
results of our consolidated company and our consolidated
hospital division. Similarly, a number of our diagnostic and
therapeutic facilities are excluded from the net revenue and
operating results of our consolidated company and our
consolidated MedCath Partners division. Our minority interest in
the results of operations for the periods discussed for these
entities is recognized as part of the equity in net earnings of
unconsolidated affiliates in our statements of income in
accordance with the equity method of accounting.
As described above, we entered into definitive agreements to
sell certain assets and liabilities of Arizona Heart Hospital,
LLC and Heart Hospital IV, LP (Heart Hospital of Austin), during
fiscal 2010. We sold our equity interests in Heart Hospital of
Lafayette and Cape Cod Cardiology Services LLC in fiscal 2008
and 2009, respectively, and the net assets of Dayton Heart
Hospital and Sun City Cardiac Center Associates in fiscal 2008
and 2009, respectively. Accordingly, for all periods presented,
the results of operations for these entities have been excluded
from continuing operations and are reported in income (loss)
from discontinued operations, net of taxes.
Same Facility Hospitals. Same facility
hospitals include only those facilities that were open and
operational during the full current and prior fiscal year
comparable periods. For example, on a same facility basis for
our consolidated hospital division for the fiscal year ended
September 30, 2010, we exclude the results of operations of
Hualapai Mountain Medical Center, which opened in October 2009.
34
Revenue Sources by Division. The largest
percentage of our net revenue is attributable to our hospital
division. The following table sets forth the percentage
contribution of each of our consolidating divisions to
consolidated net revenue in the periods indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
Division
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Hospital
|
|
|
97.3
|
%
|
|
|
95.9
|
%
|
|
|
95.5
|
%
|
MedCath Partners
|
|
|
2.6
|
%
|
|
|
4.0
|
%
|
|
|
4.4
|
%
|
Corporate and other
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
|
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 determined 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 payor in each of our last three
fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
Payor
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Medicare
|
|
|
51.2
|
%
|
|
|
51.4
|
%
|
|
|
52.1
|
%
|
Medicaid
|
|
|
4.3
|
%
|
|
|
2.9
|
%
|
|
|
3.2
|
%
|
Commercial and other, including self-pay
|
|
|
44.5
|
%
|
|
|
45.7
|
%
|
|
|
44.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated net revenue
|
|
|
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 CMS as well as the OIG.
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
near term. See Item 1 Business and Item 1A
Risk Factors.
Critical
Accounting Policies and Estimates
General. The discussion and analysis of our
financial condition and results of operations are based on our
audited consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of
our consolidated financial statements. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. We evaluate our estimates and
35
assumptions on a regular basis and make changes as experience
develops or new information becomes known. Actual results may
differ from these estimates under different assumptions or
conditions.
We define critical accounting policies as those that
(1) involve significant judgments and uncertainties,
(2) require estimates that are more difficult for
management to determine and (3) have the potential to
result in materially different results under different
assumptions and conditions. We believe that our critical
accounting policies are those described below. For a detailed
discussion of the application of these and other accounting
policies, see Note 2 to the consolidated financial
statements included elsewhere in this report.
Revenue Recognition. Amounts we receive for
treatment of patients covered by governmental programs such as
Medicare and Medicaid and other third-party payors such as
commercial insurers, health maintenance organizations and
preferred provider organizations are generally less than our
established billing rates. Payment arrangements with third-party
payors may include prospectively determined rates per discharge
or per visit, a discount from established charges, per diem
payments, reimbursed costs (subject to limits)
and/or other
similar contractual arrangements. As a result, net revenue for
services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. We account for the
difference between the estimated realizable rates under the
reimbursement program and the standard billing rates as
contractual adjustments.
The majority of our contractual adjustments are system-generated
at the time of billing based on either government fee schedules
or fee schedules contained in our managed care agreements with
various insurance plans. Portions of our contractual adjustments
are performed manually and these adjustments primarily relate to
patients that have insurance plans with whom our hospitals do
not have contracts containing discounted fee schedules, also
referred to as non-contracted payors and patients that have
secondary insurance plans following adjudication by the primary
payor. Estimates of contractual adjustments are made on a
payor-specific basis and based on the best information available
regarding our interpretation of the applicable laws, regulations
and contract terms. While subsequent adjustments to the
systematic contractual allowances can arise due to denials,
short payments deemed immaterial for continued collection effort
and a variety of other reasons, such amounts have not
historically been significant.
We continually review the contractual estimation process to
consider and incorporate updates to the laws and regulations and
any changes in the contractual terms of our programs. Final
settlements under some of these programs are subject to
adjustment based on administrative review and audit by third
parties, which can take several years to determine. From a
procedural standpoint, for government payors, primarily
Medicare, we recognize estimated settlements in our consolidated
financial statements based on filed cost reports. We
subsequently adjust those settlements as we obtain new
information from audits or reviews by the fiscal intermediary
and, if the result of the fiscal intermediary audit or review
impacts other unsettled and open cost reports, then we recognize
the impact of those adjustments. We estimate current year
settlements based on models designed to approximate our cost
report filings and revise our estimates in February of each year
upon completion of the actual cost report and tentative
settlement. 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 reasonable possibility
that recorded estimates will change by a material amount in the
near term.
We provide care to patients who meet certain criteria under our
charity care policy without charge or at amounts less than our
established rates. Patients that receive charity care discounts
must provide a complete and accurate application, be in need of
non-elective care and meet certain federal poverty guidelines
established by the U.S. Department of Health and Human
Services. Because we do not pursue collection of amounts
determined to qualify as charity care, they are not reported as
net revenue.
Our managed diagnostic and therapeutic facilities and mobile
cardiac catheterization laboratories operate under various
contracts where management fee revenue is recognized under
fixed-rate arrangements as services are rendered. In addition,
certain diagnostic and therapeutic facilities and mobile cardiac
catheterization laboratories recognize additional revenue under
cost reimbursement and equipment lease arrangements. Net revenue
from our owned diagnostic facility and mobile cardiac
catheterization laboratories is reported at the estimated net
realizable amounts due from patients, third party payors, and
others as services are rendered, including estimated retroactive
adjustments under reimbursement agreements with third-party
payors.
36
Allowance for Doubtful Accounts. Accounts
receivable primarily consist of amounts due from third-party
payors and patients in our hospital division. The remainder of
our accounts receivable principally consist of amounts due from
billings to hospitals for various cardiovascular care services
performed in our MedCath Partners Division. To provide for
accounts receivable that could become uncollectible in the
future, we establish an allowance for doubtful accounts to
reduce the carrying value of such receivables to their estimated
net realizable value. We estimate this allowance based on such
factors as payor mix, aging and the historical collection
experience and write-offs of our respective hospitals and other
business units. Adverse changes in business office operations,
payor mix, economic conditions or trends in federal and state
governmental healthcare reimbursement could affect our
collection of accounts receivable.
When possible, we will attempt to collect co-payments from
patients prior to admission for inpatient services as a part of
the pre-registration and registration processes. If
unsuccessful, we will also attempt to reach a mutually
agreed-upon
payment arrangement at that time. To the extent possible, the
estimated amount of the patients financial responsibility
is determined based on the services to be performed, the
patients applicable co-payment amount or percentage and
any identified remaining deductible and co-insurance
percentages. If payment arrangements are not provided upon
admission or only a partial payment is obtained, we will attempt
to collect any estimated remaining patient balance upon
discharge. We also comply with the requirements under applicable
law concerning collection of Medicare co-payments and
deductibles. Patients who come to our hospitals for outpatient
services are expected to make payment or adequate financial
arrangements before receiving services. Patients who come to the
emergency room are screened and stabilized to the extent of the
hospitals capability for any emergency medical condition
in accordance with applicable laws, rules and other regulations
in order that financial arrangements do not delay such
screening, stabilization, and appropriate disposition.
Professional Liability Risk. We are
self-insured for medical malpractice up to certain maximum
liability amounts. Although the amounts accrued are actuarially
determined based on analysis of historical trends of losses,
settlements, litigation costs and other factors, the amounts we
will ultimately disburse could differ from such accrued amounts.
Long-Lived Assets. Long-lived assets, which
include finite lived intangible assets, are evaluated for
impairment when events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from
the use of an asset and its eventual disposition are less than
its carrying amount. 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. Changes in our strategy,
assumptions
and/or
market conditions could significantly impact these judgments and
require adjustments to recorded amounts of long-lived assets.
See Notes 4 and 13 for a discussion of impairment charges
that the Company has recorded to write-down certain long-lived
assets.
Basis of Presentation Effective
October 1, 2009, the Company adopted a new accounting
standard which establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by
parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interests,
changes in a parents ownership interest and the valuation
of any retained noncontrolling equity investment when a
subsidiary is deconsolidated. This new accounting standard also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. This new accounting
standard generally requires the Company to clearly identify and
present ownership interests in subsidiaries held by parties
other than the Company in the consolidated financial statements
within the equity section but separate from the Companys
equity. However, in instances in which certain redemption
features that are not solely within the control of the issuer
are present, classification of noncontrolling interests outside
of permanent equity is required. It also requires the amounts of
consolidated net income attributable to the Company and to the
noncontrolling interests to be clearly identified and presented
on the face of the consolidated statements of operations;
changes in ownership interests to be accounted for as equity
transactions; and when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former
subsidiary and the gain or loss on the deconsolidation of the
subsidiary to be measured at fair value. The implementation of
this accounting standard results in the cash flow impact of
certain transactions with noncontrolling interests being
classified within financing activities. Such treatment is
consistent with the view that under this new accounting
standard, transactions between the Company
37
and noncontrolling interests are considered to be equity
transactions. The adoption of this new accounting standard has
been applied retrospectively for all periods presented.
Upon the occurrence of certain fundamental regulatory changes,
the Company could be obligated, under the terms of certain of
its investees operating agreements, to purchase some or
all of the noncontrolling interests related to certain of the
Companys subsidiaries. While the Company believes that the
likelihood of a change in current law that would trigger such
purchases was remote as of September 30, 2010, the
occurrence of such regulatory changes is outside the control of
the Company. As a result, these noncontrolling interests
totaling $11,554 and $7,448 as of September 30, 2010 and
2009, respectively, that are subject to this redemption feature
are not included as part of the Companys equity and are
carried as redeemable noncontrolling interests in equity of
consolidated subsidiaries on the Companys consolidated
balance sheets.
Profits and losses are allocated to the noncontrolling interest
in the Companys subsidiaries in proportion to their
ownership percentages and reflected in the aggregate as net
income attributable to noncontrolling interests. If, however,
the cumulative net losses of a hospital exceed its initial
capitalization and committed capital obligations of our
partners, then we recognize a disproportionately higher share,
up to 100%, of the hospitals losses, instead of the
smaller pro-rata share of the losses that normally would be
allocated to us based upon our percentage ownership (with the
exception of losses incurred at Harlingen Medical Center, which
are shared proratably based on each investors ownership
percentage). The disproportionate allocation to us of a
hospitals losses would reduce our consolidated net income
in that reporting period. When the same hospital has earnings in
a subsequent period, a disproportionately higher share, up to
100%, of the hospitals earnings will be allocated to us to
the extent we have previously recognized a disproportionate
share of that hospitals losses. The disproportionate
allocation to us of a hospitals earnings would increase
our consolidated net income in that reporting period.
The determination of disproportionate losses to be allocated is
based on the specific terms of each hospitals operating
agreement, including each partners contributed capital,
obligation to contribute additional capital to provide working
capital loans, or to guarantee the outstanding obligations of
the hospital. During each of our fiscal years 2010, 2009 and
2008, our disproportionate recognition of earnings and losses in
our hospitals had a net (negative)/positive impact of
$(12.2) million, $(2.2) million, and
$0.6 million, respectively, on our reported income from
continuing operations before income taxes and discontinued
operations.
We expect our earnings allocated to minority interests to
fluctuate in future periods as we either recognize
disproportionate losses
and/or
recoveries thereof through disproportionate profits of our
hospitals. As of September 30, 2010, we have
$13.4 million of cumulative disproportionate losses
allocated to us. We could also be required to recognize
disproportionate losses at our other hospitals not currently in
a disproportionate allocation position depending on their
results of operations in future periods.
The physician partners of the Companys subsidiaries
typically are organized as general partnerships, limited
partnerships or limited liability companies that are not subject
to federal income tax. Each physician partner shares in the
pre-tax earnings of the subsidiary in which it is a partner.
Accordingly, the income or loss attributable to noncontrolling
interests in each of the Companys subsidiaries are
generally determined on a pre-tax basis. In accordance with this
new accounting standard, total net income attributable to
noncontrolling interests are presented after net (loss) income.
Income Taxes. Income taxes are computed on the
pretax income based on current tax law. Deferred income taxes
are recognized for the expected future tax consequences or
benefits of differences between the tax bases of assets or
liabilities and their carrying amounts in the consolidated
financial statements. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these
items will either expire before we are able to realize their
benefit or their future deductibility is uncertain.
Developing the provision for income taxes requires significant
judgment and expertise in federal and state income tax laws,
regulations and strategies, including the determination of
deferred tax assets and liabilities and, if necessary, any
valuation allowances that may be required for deferred tax
assets. Our judgments and tax strategies are subject to audit by
various taxing authorities. While we believe we have provided
adequately for our income tax liabilities in our consolidated
financial statements, adverse determinations by these taxing
authorities could have a material adverse effect on our
consolidated financial condition and results of operations.
38
The Company is required to file federal and state tax returns in
the United States. The preparation of these tax returns requires
the Company to interpret the applicable tax laws and regulations
in effect in such jurisdictions, which could affect the amount
of tax paid by the Company. The Company, in consultation with
its tax advisors, bases its tax returns on interpretations that
are believed to be reasonable under the circumstances. The tax
returns, however, are subject to routine reviews by the various
taxing authorities in the jurisdictions in which the Company
files its returns. As part of these reviews, a taxing authority
may disagree with respect to the interpretations the Company
used to calculate its tax liability and therefore require the
Company to pay additional taxes and associated penalties and
interest.
The Company accrues an amount for its estimate of probable
additional income tax liability. The Company recognizes the
impact of an uncertain income tax position on the income tax
return at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant tax authority. An uncertain
income tax position will not be recognized if it has less than
50% likelihood of being sustained. As of September 30,
2010, the Company does not have accruals for any uncertain
income tax positions.
Share-Based Compensation Compensation expense
for share-based awards made to employees and directors are
recognized based on the estimated fair value of each award over
the awards vesting period. We estimate the fair value of
share-based payment awards on the date of grant using, either an
option-pricing model for stock options or the closing market
value of our stock for restricted stock and restricted stock
units, and expense the value of the portion of the award that is
ultimately expected to vest over the requisite service period in
the Companys statement of operations.
We calculated the share-based compensation expense for each
stock option on the date of grant by using a Black-Scholes
option pricing model. The key assumptions used in the
Black-Scholes option pricing model are the expected life of the
stock option, the risk free interest rate and expected
volatility. The expected volatility used in the Black-Scholes
option pricing model incorporates historical share-price
volatility and was based on an analysis of historical prices of
our stock. The expected volatility reflects the historical
volatility for a duration consistent with the contractual life
of the options. The expected life of the stock options granted
represents the period of time that the options are expected to
be outstanding. The risk-free interest rates are based on
zero-coupon United States Treasury yields in effect at the date
of grant consistent with the expected exercise timeframes.
Stock options awarded to employees are fully vested at the time
of grant, with the condition that the optionee is prohibited
from selling the share of stock acquired upon exercise of the
option for a specified period of time. As a result, total
share-based compensation is recorded for stock options on the
option grant date.
During fiscal 2009 and 2010 we granted shares of restricted
stock and restricted stock units to employees and directors,
respectively. Restricted stock granted to employees, excluding
executives of the Company, vest in equal annual installments
over a three year period. Executives of the Company (defined by
us as vice president or higher) received two restricted stock
grants. The first grant of restricted stock vests in equal
annual installments over a three year period. The second grant
of restricted stock vests over a three year period based on
established performance conditions. 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. Restricted stock units granted to
directors are fully vested at the date of grant and are paid in
the form of common stock upon each applicable directors
termination of service on the board.
Recent Accounting Pronouncements: See
Note 2 of our consolidated financial statements included
elsewhere in this report for additional disclosures.
39
Results
of Operations
Fiscal
Year 2010 Compared to Fiscal Year 2009
Statement of Operations Data. The following
table presents our results of operations in dollars and as a
percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Net revenue
|
|
$
|
442,496
|
|
|
$
|
419,733
|
|
|
$
|
22,763
|
|
|
|
5.4
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
151,990
|
|
|
|
141,315
|
|
|
|
10,675
|
|
|
|
7.6
|
%
|
|
|
34.3
|
%
|
|
|
33.7
|
%
|
Medical supplies expense
|
|
|
113,588
|
|
|
|
111,253
|
|
|
|
2,335
|
|
|
|
2.1
|
%
|
|
|
25.7
|
%
|
|
|
26.5
|
%
|
Bad debt expense
|
|
|
46,887
|
|
|
|
39,068
|
|
|
|
7,819
|
|
|
|
20.0
|
%
|
|
|
10.6
|
%
|
|
|
9.3
|
%
|
Other operating expenses
|
|
|
104,327
|
|
|
|
90,603
|
|
|
|
13,724
|
|
|
|
15.1
|
%
|
|
|
23.6
|
%
|
|
|
21.6
|
%
|
Pre-opening expenses
|
|
|
866
|
|
|
|
3,563
|
|
|
|
(2,697
|
)
|
|
|
(75.7
|
)%
|
|
|
0.2
|
%
|
|
|
0.9
|
%
|
Depreciation
|
|
|
26,895
|
|
|
|
22,818
|
|
|
|
4,077
|
|
|
|
17.9
|
%
|
|
|
6.1
|
%
|
|
|
5.4
|
%
|
Amortization
|
|
|
32
|
|
|
|
891
|
|
|
|
(859
|
)
|
|
|
(96.4
|
)%
|
|
|
|
|
|
|
0.2
|
%
|
Impairment of long-lived assets and goodwill
|
|
|
66,822
|
|
|
|
51,500
|
|
|
|
15,322
|
|
|
|
29.8
|
%
|
|
|
15.1
|
%
|
|
|
12.3
|
%
|
Loss on disposal of property, equipment and other assets
|
|
|
57
|
|
|
|
192
|
|
|
|
(135
|
)
|
|
|
(70.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(68,968
|
)
|
|
|
(41,470
|
)
|
|
|
(27,498
|
)
|
|
|
66.3
|
%
|
|
|
(15.6
|
)%
|
|
|
(9.9
|
)%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,548
|
)
|
|
|
(3,746
|
)
|
|
|
(802
|
)
|
|
|
21.4
|
%
|
|
|
(1.0
|
)%
|
|
|
(0.9
|
)%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
6,702
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
(1.6
|
)%
|
Interest and other income
|
|
|
84
|
|
|
|
217
|
|
|
|
(133
|
)
|
|
|
(61.3
|
)%
|
|
|
|
|
|
|
0.1
|
%
|
Loss on note receiveable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
(100.0
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,267
|
|
|
|
9,057
|
|
|
|
(1,790
|
)
|
|
|
(19.8
|
)%
|
|
|
1.5
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(67,672
|
)
|
|
|
(42,644
|
)
|
|
|
(25,028
|
)
|
|
|
58.7
|
%
|
|
|
(15.3
|
)%
|
|
|
(10.2
|
)%
|
Income tax benefit
|
|
|
(26,662
|
)
|
|
|
(362
|
)
|
|
|
(26,300
|
)
|
|
|
7265.2
|
%
|
|
|
(6.0
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(41,010
|
)
|
|
|
(42,282
|
)
|
|
|
1,272
|
|
|
|
(3.0
|
)%
|
|
|
(9.4
|
)%
|
|
|
(10.1
|
)%
|
Income from discontinued operations, net of taxes
|
|
|
5,028
|
|
|
|
9,527
|
|
|
|
(4,499
|
)
|
|
|
(47.2
|
)%
|
|
|
1.2
|
%
|
|
|
2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(35,982
|
)
|
|
|
(32,755
|
)
|
|
|
(3,227
|
)
|
|
|
9.9
|
%
|
|
|
(8.1
|
)%
|
|
|
(7.8
|
)%
|
Less: Net income attributable to noncontrolling interest
|
|
|
(12,389
|
)
|
|
|
(17,527
|
)
|
|
|
5,138
|
|
|
|
(29.3
|
)%
|
|
|
(2.8
|
)%
|
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to MedCath Corporation
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
1,911
|
|
|
|
(3.8
|
)%
|
|
|
(10.9
|
)%
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to MedCath Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
|
$
|
(51,956
|
)
|
|
$
|
(51,655
|
)
|
|
$
|
(301
|
)
|
|
|
0.6
|
%
|
|
|
(11.7
|
)%
|
|
|
(12.3
|
)%
|
Income from discontinued operations, net of taxes
|
|
|
3,585
|
|
|
|
1,373
|
|
|
|
2,212
|
|
|
|
161.1
|
%
|
|
|
0.8
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
1,911
|
|
|
|
(3.8
|
)%
|
|
|
(10.9
|
)%
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Net revenue. Below is selected procedural and
net revenue data for the fiscal years ended September 30,
2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division Continuing Operations
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2010
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
(Decrease)
|
|
|
Admission and Principal Procedures(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient admissions
|
|
|
22,010
|
|
|
|
27
|
%
|
|
|
19,894
|
|
|
|
30
|
%
|
|
|
10.6
|
%
|
Outpatient procedures(2)
|
|
|
26,050
|
|
|
|
31
|
%
|
|
|
21,933
|
|
|
|
33
|
%
|
|
|
18.8
|
%
|
ED and heart saver program
|
|
|
35,084
|
|
|
|
42
|
%
|
|
|
24,256
|
|
|
|
37
|
%
|
|
|
44.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total procedures
|
|
|
83,144
|
|
|
|
100
|
%
|
|
|
66,083
|
|
|
|
100
|
%
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDC 5 procedures(3)
|
|
|
14,862
|
|
|
|
|
|
|
|
14,420
|
|
|
|
|
|
|
|
3.1
|
%
|
IP Drug Eluting Stents
|
|
|
2,382
|
|
|
|
|
|
|
|
2,141
|
|
|
|
|
|
|
|
11.3
|
%
|
IP Bare Metal Stents
|
|
|
1,357
|
|
|
|
|
|
|
|
1,588
|
|
|
|
|
|
|
|
(14.5
|
)%
|
OP Drug Eluting Stents
|
|
|
1,151
|
|
|
|
|
|
|
|
1,027
|
|
|
|
|
|
|
|
12.1
|
%
|
OP Bare Metal Stents
|
|
|
778
|
|
|
|
|
|
|
|
796
|
|
|
|
|
|
|
|
(2.3
|
)%
|
Non MDC 5 procedures
|
|
|
68,282
|
|
|
|
|
|
|
|
51,663
|
|
|
|
|
|
|
|
32.2
|
%
|
ED visits
|
|
|
30,017
|
|
|
|
|
|
|
|
19,769
|
|
|
|
|
|
|
|
51.8
|
%
|
Net Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient net revenue
|
|
|
70.1
|
%
|
|
|
|
|
|
|
72.1
|
%
|
|
|
|
|
|
|
(2.8
|
)%
|
Outpatient net revenue
|
|
|
21.5
|
%
|
|
|
|
|
|
|
21.4
|
%
|
|
|
|
|
|
|
0.5
|
%
|
ED and HeartSaver CT program
|
|
|
8.4
|
%
|
|
|
|
|
|
|
6.5
|
%
|
|
|
|
|
|
|
29.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100.0
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charity care
|
|
$
|
7,538
|
|
|
|
|
|
|
$
|
4,266
|
|
|
|
|
|
|
|
76.7
|
%
|
|
|
|
(1) |
|
Procedures refer to the total cases billed and revenues
recognized. |
|
(2) |
|
Excludes emergency department and our HeartSaver CT program. |
|
(3) |
|
Major Diagnostic Category (MDC) 5 corresponds to a
circulatory system principal diagnosis. We have historically
referred to MDC 5 procedures as our core procedures. |
Same Facility Hospitals. Same facility
hospitals include only those facilities that were open and
operational during the full current and prior fiscal year
comparable periods. For example, on a same facility basis for
our consolidated hospital division for the year ended
September 30, 2010, we exclude the results of operations of
Hualapai Mountain Medical Center, which opened in October 2009.
During the years ended September 30, 2010 and 2009, the
Company incurred $0.9 million and $3.6 million,
respectively, in pre-opening expenses related to projects under
development at Hualapai Mountain Medical Center.
Net revenue increased 5.4% to $442.5 million for our fiscal
year ended September 30, 2010 from $419.7 million for
our fiscal year ended September 30, 2009. Of this
$22.8 million increase in net revenue, our Hospital
Division generated a $28.0 million increase, our MedCath
Partners Division decreased by $5.2 million, and the
Corporate and other division remained flat. The Hospital
Division increase was attributable to an increase in our net
patient revenue while the hospital division other operating
revenue remained the same during the 2010 fiscal year compared
to the 2009 fiscal year. Net revenue on a same facility basis
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Net revenue
|
|
$
|
415,424
|
|
|
$
|
419,733
|
|
|
$
|
(4,309
|
)
|
|
|
(1.0
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
41
Net revenue is comprised of net patient revenue and other
operating revenue. Our same facility net patient revenue
increased approximately $1.1 million during fiscal 2010
compared to fiscal 2009 while our other operating revenue
decreased approximately $5.4 million, of which
$5.2 million was experienced in our MedCath Partners
Division. Beginning in our first quarter of fiscal 2010, our
MedCath Partners Division renegotiated certain management
contracts. As a result, certain personnel expenses once incurred
by and reimbursed to our MedCath Partners Division, were no
longer incurred as a result of employees no longer being
employed by MedCath Partners. Therefore, the decline in other
operating revenue was offset by a reduction in salary expenses
due to this change.
Our same facility hospital division inpatient net revenue
decreased approximately $6.4 million while our inpatient
admissions increased by 2.3%. The inpatient net revenue decrease
was offset by an increase in outpatient revenue, including
emergency department revenue of approximately $4.2 million,
driven by an increase in outpatient cases of approximately 7.4%.
Our inpatient net revenue decline was primarily due to a
$9.6 million decrease in open heart revenue, a
$4.6 million decrease in non-drug eluting stent net
revenue, and a $2.1 million decrease in AICD net revenue
offset by a $2.6 million increase in drug-eluting stent
revenue and a $8.3 million increase in non-cardiovascular
net inpatient revenue. We believe the decline in open heart
surgeries and the use of AICDs is indicative that less
invasive cardiac procedures, such as stents, and pharmaceutical
treatments have been successful for patients at our hospitals.
Our non-cardiovascular net inpatient revenue has increased as we
have diversified our services and have provided musculoskeletal
procedures at certain of our hospitals and also experienced an
increase in patient cases related to respiratory and digestive
care.
Our same facility emergency department visits and net revenue
increased 9.5% and 10.1%, respectively, during fiscal 2010
compared to fiscal 2009, driven primarily by our expansion and
marketing efforts. In addition, we experienced an increase in
outpatient AICD implants, pacer implants and EP
studies/ablations, which experienced a 5.2% increase in cases
and a 9.1% increase in net revenue.
Our same facility net revenue was impacted by an overall
increase in deductions for uncompensated care of
$3.3 million. We commonly refer to these deductions as
charity care. Charity care was $7.5 million for fiscal 2010
compared to $4.3 million for fiscal 2009. Charity care is
recorded for patients that meet certain federal poverty
guidelines and request charity consideration in line with our
policy. The number of patients that qualified for charity care
increased during fiscal 2010 compared to fiscal 2009.
During fiscal 2009 we recognized net negative contractual
adjustments to our net revenue of $4.5 million related to
the filing of prior years Medicare cost reports as well as other
Medicare and Medicaid settlement adjustments. Therefore, these
adjustments had a year over year positive impact of
$4.5 million to net revenue.
Personnel expense. Personnel expense increased
7.6% to $152.0 million for fiscal 2010 from
$141.3 million for fiscal 2009. As a percentage of net
revenue, personnel expense increased slightly from 33.7% to
34.3% for the comparable periods. Personnel expense on a same
facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Personnel expense
|
|
$
|
137,433
|
|
|
$
|
141,315
|
|
|
$
|
(3,882
|
)
|
|
|
(2.7
|
)%
|
|
|
33.1
|
%
|
|
|
33.7
|
%
|
We recognized share-based compensation expense of
$3.1 million and $2.4 million for the fiscal years
ended September 2010 and 2009, respectively. The
$0.7 million increase in share-based compensation expense
was offset by a $6.2 million decrease in personnel expense.
$2.1 million of the personnel expense decrease was the
result of a reduction in workforce in our Partners Division as a
result of renegotiating certain management contracts whereby we
no longer employed the employees of certain ventures. In
addition, the Hospital Divisions contract labor has
declined as we align our expenses with our patient revenues and
admissions. Our bonus expense increased approximately
$1.1 million during fiscal 2010 compared to fiscal 2009 as
the criteria for the attainment of bonuses were met during
fiscal 2010 for certain of our hospitals.
42
Medical supplies expense. Medical supplies
expense increased 2.1% to $113.6 million, or 25.7% of net
revenue, for fiscal 2010 from $111.3 million, or 26.5% of
net revenue, for fiscal 2009. Medical supplies expense on a same
facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(In thousands except percentages)
|
|
|
|
|
|
|
|
|
Medical supplies expense
|
|
$
|
108,579
|
|
|
$
|
111,253
|
|
|
$
|
(2,674
|
)
|
|
|
(2.4
|
)%
|
|
|
26.1
|
%
|
|
|
26.5
|
%
|
Our same facility medical supplies expense decreased as a result
of a 9.9% reduction in open heart surgeries and a 10.1%
reduction in AICD implantations, procedures that have higher net
revenue per case as compared to other procedures performed at
our hospitals. With less open heart and AICD net revenue,
medical supplies will increase as a percentage of net revenue.
The supply expense decrease was partially offset by an increase
in the utilization of higher cost per unit devices.
Bad debt expense. Bad debt expense increased
20.0% to $46.9 million for fiscal 2010 from
$39.1 million for fiscal 2009. Bad debt expense on a same
facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Bad debt expense
|
|
$
|
43,206
|
|
|
$
|
39,068
|
|
|
$
|
4,138
|
|
|
|
10.6
|
%
|
|
|
10.4
|
%
|
|
|
9.3
|
%
|
We have experienced an increase in bad debt expense primarily
related to an increase in the uncollectibility of the self-pay
balance after insurance and an 8.1% increase in self-pay net
revenue during fiscal 2010 compared to fiscal 2009.
Total uncompensated care, which includes charity care deductions
recorded as a reduction to patient revenue and bad debt expense,
was $50.7 million for fiscal 2010, or 12.5% of same
facility Hospital Division net patient revenue, compared to
$43.3 million, or 10.8% of same facility Hospital Division
net patient revenue for fiscal 2009.
Other operating expenses. Other operating
expenses increased 15.1% to $104.3 million for fiscal 2010
from $90.6 million for fiscal 2009. Other operating expense
on a same facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Other operating expense
|
|
$
|
94,028
|
|
|
$
|
90,603
|
|
|
$
|
3,425
|
|
|
|
3.8
|
%
|
|
|
22.6
|
%
|
|
|
21.6
|
%
|
Notable increases and (decreases) in our same facility other
operating expenses were as follows:
|
|
|
|
|
Professional fees
|
|
$
|
2,575
|
|
Employee benefits
|
|
$
|
2,343
|
|
Repairs and maintenance
|
|
$
|
825
|
|
Corporate salaries and bonuses, net
|
|
$
|
(234
|
)
|
Professional liability insurance
|
|
$
|
(992
|
)
|
Advertising
|
|
$
|
(1,045
|
)
|
Our professional fees increased $2.6 million during fiscal
2010 compared to fiscal 2009. Professional fees increased
$3.8 million due to the expenses incurred related to the
review and implementation of our strategic alternatives as well
as fees incurred related to entering into definitive agreements
to sell the Heart Hospital of Austin, Arizona Heart Hospital and
Avera Heart Hospital of South Dakota, which were all completed
subsequent to September 30, 2010, and TexSan Heart
Hospital, which was announced subsequent to September 30,
2010. This
43
increase was partially offset by a decline in professional fees
associated with growth initiatives and other non-recurring
internal projects that were incurred during fiscal 2009.
Corporate employee benefits expense has increased due to an
increase in specific claims expense for our employees during
fiscal 2010 compared to the same period of the prior year. Since
we are self-insured for medical claims and our medical claims
expense can fluctuate based on the total number of claims we
experience for any given period.
Corporate salaries and wages have declined $1.7 million due
to attrition in employees related to the announcement that we
are considering our strategic alternatives and a reduction in
hiring of new employees offset by a $0.7 million increase
in severance expense as a result of exploring these options. The
alternatives include, but are not limited to, the possible sale
of all or parts of the Company. This decline was offset by a
$0.5 million increase in stay-on bonus expense incurred to
retain employees during the strategic alternatives process.
We incurred specific large dollar professional liability
insurance claims for certain of our hospitals during fiscal
2009. In contrast, we experienced favorable claim experience
during fiscal 2010. As a result of the reduction in specific
claims during fiscal 2010 and favorable claim experience for the
current policy year, our overall professional liability
insurance cost has declined $1.0 million.
We increased our marketing and advertising budget during fiscal
2009 to promote several of our facility expansions and certain
direct mailing and radio programs to increase market share. Our
advertising expenses declined $1.0 million during fiscal
2010 to better align our operating expenses with our revenues
and also as a result of the review of our strategic alternatives.
Depreciation. Depreciation increased 17.9% to
$26.9 million for the fiscal year ended September 30,
2010 as compared to $22.8 million for the fiscal year ended
September 30, 2009. The increase in depreciation is the
direct result of expansion at several of our facilities, the
opening of Hualapai Mountain Medical Center on October 15,
2009, as well as the purchase of newer computer equipment to
replace outdated hardware.
Impairment of long-lived assets and
goodwill. Impairment of long-lived assets and
goodwill increased 29.8% to $66.8 million for fiscal 2010
compared to $51.5 million for fiscal 2009. In fiscal 2010,
the Company recognized impairments of property and equipment
primarily related to the Hospital Division due to declines in
operating performance as well as the ongoing review of strategic
alternatives for the Company. When a cash flow projection or
independent third party market offers indicated impairment
existed, the Company reduced long-lived assets to their
estimated fair value. In fiscal 2009, the Company recognized an
impairment indicator relative its goodwill which was all related
to the Hospital Division due to the overall financial
performance of the Company and resulting decline in market
capitalization. Subsequent analysis determined that the Hospital
Divisions carrying value was in excess of its fair value
and that the implied fair value of the goodwill was zero.
Interest expense. Interest expense increased
21.4% to $4.5 million for fiscal 2010 compared to
$3.7 million for fiscal 2009. The Company would have
experienced a decrease due to capitalization of
$2.7 million of interest on our capital expansion projects
in fiscal 2009. The Company did not capitalize any interest in
fiscal 2010. The decrease in pre-capitalization interest expense
is primarily attributable to the overall reduction in our
outstanding debt.
Loss on early extinguishment of debt. During
December 2008, we redeemed all of our outstanding
97/8% Senior
Notes for $111.2 million, which included the payment of a
repurchase premium of $5.0 million and accrued interest of
$4.2 million. The Senior Notes were redeemed through
borrowings under the Senior Secured Credit Facility and
available cash on hand. In addition, we incurred
$2.0 million in expenses related to the write-off of
previously incurred financing costs associated with the Senior
Notes. There was no loss on early extinguishment of debt for
fiscal 2010.
Interest and other income, net. Interest and
other income, net decreased 61.3% to $0.1 million for
fiscal 2010 compared to $0.2 million for fiscal 2009. The
decrease is a result of the decrease in cash balances and the
decrease in interest earned on cash balances during fiscal 2010.
44
Loss on note receivable. Our corporate and
other division entered into a note receivable agreement with a
third party during 2008. The note receivable was deemed
uncollectable and a loss of $1.5 million was recorded in
fiscal 2010 due to our determination of the third partys
inability to repay the note and the insufficiency of the value
of the collateral securing the note. There were no similar
losses recorded in fiscal 2009.
Equity in net earnings of unconsolidated
affiliates. Equity in net earnings of
unconsolidated affiliates decreased to $7.3 million in
fiscal 2010 from $9.1 million in fiscal 2009. Earnings from
operating activity of our unconsolidated affiliates remained
relatively flat during fiscal 2010 compared to fiscal 2009 and
our ownership interest in those entities remained materially the
same for the two periods. However, the Company recognized a
$1.9 million writedown of its investment in Southwest
Arizona Heart and Vascular, LLC in fiscal 2010 based on the
expected proceeds from the disposition of the Companys
interest to be received in fiscal 2011. Also, the Company
expects a decline in future equity in net earnings of
unconsolidated affiliates due to the disposition of its interest
in Avera Heart Hospital of South Dakota on October 1, 2010
and the disposition of its interest in Southwest Arizona Heart
and Vascular, LLC on November 1, 2010.
Net income attributable to noncontrolling
interest. Noncontrolling interest share of
earnings of consolidated subsidiaries decreased
$5.1 million in fiscal 2010 compared to fiscal 2009. Net
income attributable to noncontrolling interests on a same
facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
% of Net
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
Revenue
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands except percentages)
|
|
|
Net income attributable to noncontrolling interest
|
|
$
|
10,502
|
|
|
$
|
17,527
|
|
|
$
|
(7,025
|
)
|
|
|
(40.1
|
)%
|
|
|
2.5
|
%
|
|
|
4.2
|
%
|
Net income attributable to noncontrolling interest represents
the portion of net income allocated to the minority owners of
our consolidated subsidiaries. We allocate earnings to the
minority owners based on their pro-rata share of earnings for
the given period unless we are in disproportionate share
accounting. During fiscal 2010 we allocated more losses
disproportionate to our ownership interest where the minority
owners capital balance has been reduced to zero per the
partnership operating agreements. As a result of absorbing more
losses during fiscal 2010, the total share of income allocated
to minority owners has increased relative to our total net
income. We expect our earnings allocated to minority interests
to fluctuate in future periods as we either recognize
disproportionate losses
and/or
recoveries thereof through disproportionate profit recognition.
In addition, we incurred approximately $2.9 million in
expense, net of tax, related to the redemption feature of a
redeemable noncontrolling interest put option entered into with
the minority interest holders at one of our hospitals during the
fourth quarter of fiscal 2010. We classified the redeemable
noncontrolling interest as temporary equity in the Consolidated
Balance Sheets, outside of stockholders equity. We
recorded the redeemable noncontrolling interest at the
redemption value, net of tax, as prescribed in the operating
agreement and accounting literature.
Income tax (benefit) expense. Income tax
benefit was $(26.7) million for fiscal 2010 compared to
$(0.4) million for fiscal 2009, which represented an
effective tax rate of (39.4%) and (0.8%), respectively. The
fiscal 2010 effective rate is above our federal statutory rate
of (35.0%) primarily due to the effect of the adoption of a new
accounting pronouncement regarding noncontrolling interest (see
Note 2), which requires the net income or loss attributable
to noncontrolling interest be including in the determination of
pretax income or loss in the Companys effective rate
calculation. The fiscal 2009 effective rate is below our federal
statutory rate of 35.0% primarily due to the non-deductibility
for income tax purposes of a majority of the $51.5 million
impairment expense related to goodwill.
Income from discontinued operations, net of
taxes. Income from discontinued operations, net
of taxes, principally reflects the operating results of Heart
Hospital IV, LP (a/ka/ Heart Hospital of Austin,
HHA), Arizona Heart Hospital LLC (AzHH),
Cape Cod Cardiology Services LLC (Cape Cod), and Sun
City Cardiac Center Associates (Sun City). Net
income from discontinued operations was $5.0 million for
fiscal 2010 compared to $9.5 million for fiscal 2009.
Income from discontinued operations, net of taxes during fiscal
2010 is principally the income from operations of HHA, offset by
operating losses at other discontinued entities, principally
losses at
45
AzHH. Income from discontinued operations, net of taxes,
includes the gains on the sale of Cape Cod and Sun City during
fiscal 2009 and income from operations of HHA, partially offset
by operating losses of other discontinued entities, principally
losses at AzHH.
Fiscal
Year 2009 Compared to Fiscal Year 2008
Statement of Operations Data. The following
table presents our results of operations in dollars and as a
percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
% of Net Revenue
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands except percentages)
|
|
|
Net revenue
|
|
$
|
419,733
|
|
|
$
|
414,155
|
|
|
$
|
5,578
|
|
|
|
1.3
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
141,315
|
|
|
|
136,009
|
|
|
|
5,306
|
|
|
|
3.9
|
%
|
|
|
33.7
|
%
|
|
|
32.8
|
%
|
Medical supplies expense
|
|
|
111,253
|
|
|
|
104,616
|
|
|
|
6,637
|
|
|
|
6.3
|
%
|
|
|
26.5
|
%
|
|
|
25.3
|
%
|
Bad debt expense
|
|
|
39,068
|
|
|
|
33,070
|
|
|
|
5,998
|
|
|
|
18.1
|
%
|
|
|
9.3
|
%
|
|
|
8.0
|
%
|
Other operating expenses
|
|
|
90,603
|
|
|
|
84,230
|
|
|
|
6,373
|
|
|
|
7.6
|
%
|
|
|
21.6
|
%
|
|
|
20.3
|
%
|
Pre-opening expenses
|
|
|
3,563
|
|
|
|
786
|
|
|
|
2,777
|
|
|
|
353.3
|
%
|
|
|
0.9
|
%
|
|
|
0.2
|
%
|
Depreciation
|
|
|
22,818
|
|
|
|
21,714
|
|
|
|
1,104
|
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
|
|
5.3
|
%
|
Amortization
|
|
|
891
|
|
|
|
32
|
|
|
|
859
|
|
|
|
2684.4
|
%
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
Impairment of long-lived assets and goodwill
|
|
|
51,500
|
|
|
|
|
|
|
|
51,500
|
|
|
|
100.0
|
%
|
|
|
12.3
|
%
|
|
|
|
|
Loss on disposal of property, equipment and other assets
|
|
|
192
|
|
|
|
124
|
|
|
|
68
|
|
|
|
54.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(41,470
|
)
|
|
|
33,574
|
|
|
|
(75,044
|
)
|
|
|
(223.5
|
)%
|
|
|
(9.9
|
)%
|
|
|
8.1
|
%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,746
|
)
|
|
|
(11,242
|
)
|
|
|
7,496
|
|
|
|
(66.7
|
)%
|
|
|
(0.9
|
)%
|
|
|
(2.7
|
)%
|
Loss on early extinguishment of debt
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
(100.0
|
)%
|
|
|
(1.6
|
)%
|
|
|
|
|
Interest and other income
|
|
|
217
|
|
|
|
1,917
|
|
|
|
(1,700
|
)
|
|
|
(88.7
|
)%
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
9,057
|
|
|
|
7,891
|
|
|
|
1,166
|
|
|
|
14.8
|
%
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(42,644
|
)
|
|
|
32,140
|
|
|
|
(74,784
|
)
|
|
|
(232.7
|
)%
|
|
|
(10.2
|
)%
|
|
|
7.8
|
%
|
Income tax (benefit) expense
|
|
|
(362
|
)
|
|
|
8,296
|
|
|
|
(8,658
|
)
|
|
|
(104.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(42,282
|
)
|
|
|
23,844
|
|
|
|
(66,126
|
)
|
|
|
(277.3
|
)%
|
|
|
(10.1
|
)%
|
|
|
5.8
|
%
|
Income from discontinued operations, net of taxes
|
|
|
9,527
|
|
|
|
19,004
|
|
|
|
(9,477
|
)
|
|
|
(49.9
|
)%
|
|
|
2.3
|
%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(32,755
|
)
|
|
|
42,848
|
|
|
|
(75,603
|
)
|
|
|
(176.4
|
)%
|
|
|
(7.8
|
)%
|
|
|
10.3
|
%
|
Less: Net income attributable to noncontrolling interest
|
|
|
(17,527
|
)
|
|
|
(21,858
|
)
|
|
|
4,331
|
|
|
|
(19.8
|
)%
|
|
|
(4.2
|
)%
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to MedCath Corporation
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
$
|
(71,272
|
)
|
|
|
(339.6
|
)%
|
|
|
(12.0
|
)%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to MedCath Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
|
$
|
(51,655
|
)
|
|
$
|
10,645
|
|
|
$
|
(62,300
|
)
|
|
|
(585.3
|
)%
|
|
|
(12.3
|
)%
|
|
|
2.6
|
%
|
Income from discontinued operations, net of taxes
|
|
|
1,373
|
|
|
|
10,345
|
|
|
|
(8,972
|
)
|
|
|
(86.7
|
)%
|
|
|
0.3
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
$
|
(71,272
|
)
|
|
|
(339.6
|
)%
|
|
|
(12.0
|
)%
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Net revenue. Below is selected procedural and
net revenue data for the fiscal years ended September 30,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division Continuing Operations
|
|
|
|
Year Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
(Decrease)
|
|
|
Admission and Principal Procedures(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient admissions
|
|
|
19,894
|
|
|
|
30
|
%
|
|
|
20,962
|
|
|
|
34
|
%
|
|
|
(5.1
|
)%
|
Outpatient procedures(2)
|
|
|
21,933
|
|
|
|
33
|
%
|
|
|
18,757
|
|
|
|
31
|
%
|
|
|
16.9
|
%
|
ED and heart saver program
|
|
|
24,256
|
|
|
|
37
|
%
|
|
|
21,147
|
|
|
|
35
|
%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total procedures
|
|
|
66,083
|
|
|
|
100
|
%
|
|
|
60,866
|
|
|
|
100
|
%
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MDC 5 procedures(3)
|
|
|
14,420
|
|
|
|
|
|
|
|
15,909
|
|
|
|
|
|
|
|
(9.4
|
)%
|
IP Drug Eluting Stents
|
|
|
2,141
|
|
|
|
|
|
|
|
2,165
|
|
|
|
|
|
|
|
(1.1
|
)%
|
IP Bare Metal Stents
|
|
|
1,588
|
|
|
|
|
|
|
|
2,645
|
|
|
|
|
|
|
|
(40.0
|
)%
|
OP Drug Eluting Stents
|
|
|
1,027
|
|
|
|
|
|
|
|
471
|
|
|
|
|
|
|
|
118.0
|
%
|
OP Bare Metal Stents
|
|
|
796
|
|
|
|
|
|
|
|
445
|
|
|
|
|
|
|
|
78.9
|
%
|
Non MDC 5 procedures
|
|
|
51,663
|
|
|
|
|
|
|
|
44,957
|
|
|
|
|
|
|
|
14.9
|
%
|
ED visits
|
|
|
19,769
|
|
|
|
|
|
|
|
17,127
|
|
|
|
|
|
|
|
15.4
|
%
|
Net Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inpatient net revenue
|
|
|
72.1
|
%
|
|
|
|
|
|
|
77.4
|
%
|
|
|
|
|
|
|
(6.8
|
)%
|
Outpatient net revenue
|
|
|
21.4
|
%
|
|
|
|
|
|
|
16.7
|
%
|
|
|
|
|
|
|
28.1
|
%
|
ED and HeartSaver CT program
|
|
|
6.5
|
%
|
|
|
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100.0
|
%
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charity care
|
|
$
|
4,266
|
|
|
|
|
|
|
$
|
12,176
|
|
|
|
|
|
|
|
(65.0
|
)%
|
|
|
|
(1) |
|
Procedures refer to the total cases billed and revenues
recognized. |
|
(2) |
|
Excludes emergency department and our HeartSaver CT program. |
|
(3) |
|
Major Diagnostic Category (MDC) 5 corresponds to a
circulatory system principal diagnosis. We have historically
referred to MDC 5 procedures as our core procedures. |
Net revenue increased 1.3% to $419.7 million for our fiscal
year ended September 30, 2009 from $414.2 million for
our fiscal year ended September 30, 2008. Of this
$5.5 million increase in net revenue, our Hospital Division
generated a 1.8%, or $7.0 million increase, our MedCath
Partners Division generated a $1.4 million decrease and our
Corporate and other Division generated a $0.1 million
decrease.
We continued to experience a shift from inpatient to outpatient
procedures in our Hospital Division during fiscal 2009. Our
inpatient admissions were down 5.1% for the 2009 fiscal year
compared to the 2008 fiscal year; however our outpatient
procedures, excluding emergency department visits, increased
16.0% as a result of the shift from inpatient to outpatient
procedures. Our emergency department visits increased 15.4%
during fiscal 2009 compared to fiscal 2008, driven primarily by
our expansion and marketing efforts. Total outpatient net
patient revenue excluding emergency department and our Heart
Saver program net revenue increased from 22.6% of total hospital
net revenue for fiscal 2008 to 27.9% for fiscal 2009.
During 2009 we established a consolidated primary care physician
group at one of our hospitals. Net revenue for fiscal 2009
includes $1.0 million related to this new group. The
related expenses are also reported as a component of income from
operations.
Our net revenue was positively impacted by an overall decrease
in deductions for uncompensated care of 65.0% or
$7.9 million. We commonly refer to these deductions as
charity care. Charity care was $4.3 million for fiscal 2009
compared to $12.2 million for fiscal 2008. Charity care is
recorded for patients that meet certain federal
47
poverty guidelines and request charity consideration in line
with our policy. The number of patients that qualified for
charity care decreased during fiscal 2009 compared to fiscal
2008.
During fiscal 2009 and 2008, we recognized net negative
contractual adjustments to our net revenue of $4.5 million
and $0.4 million, respectively, related to the filing of
prior years Medicare cost reports as well as other Medicare and
Medicaid settlement adjustments. Therefore, these adjustments
had a year over year negative impact of $4.1 million to net
revenue.
Personnel expense. Personnel expense increased
3.9% to $141.3 million for fiscal 2009 from
$136.0 million for fiscal 2008. As a percentage of net
revenue, personnel expense increased from 32.8% to 33.7%.
We recognized share-based compensation expense of
$2.4 million and $5.0 million for the fiscal years
ended September 2009 and 2008, respectively. The
$2.6 million decrease in share-based compensation expense
was offset by an increase in personnel expense related to cost
of living wage adjustments made during the first quarter of
fiscal 2009 and an increase in our Hospital Division benefit
costs related to our self-insured medical plan due to an
increase in employee related medical claims during fiscal 2009.
Medical supplies expense. Medical supplies
expense increased 6.3% to $111.3 million, or 26.5% of net
revenue, for fiscal 2009 from $104.6 million, or 25.3% of
net revenue, for fiscal 2008. We experienced an increase in
expense related to AICDs, heart valves, drug-eluting
stents and vascular graft supplies during fiscal 2009 offset by
a reduction in expense for bare metal stents, orthopedic and
chargeable medical supplies. The increase in AICDs, heart
valves, drug-eluting stents and vascular graft supplies was
directly related to a combination of a higher utilization of
supplies per procedure, an increase in the number of procedures
performed or the use of higher cost supplies for these
procedures. Conversely, the reduction in bare metal stents and
orthopedic supplies is the direct result of lower utilization of
supplies per procedure and lower cost for the units used per
procedure.
Bad debt expense. Bad debt expense increased
18.1% to $39.1 million for fiscal 2009 from
$33.1 million for fiscal 2008. Total uncompensated care,
which includes charity care deductions recorded as a reduction
to patient revenue and bad debt expense, was $43.3 million
for fiscal 2009, or 10.8% of Hospital Division net patient
revenue, compared to $45.2 million, or 11.2% of Hospital
Division net patient revenue for fiscal 2008. We have
experienced an increase in bad debt expense primarily related to
an increase in the uncollectibility of the self-pay balance
after insurance and a reduction in patients that qualify for
charity care
and/or
government assistance. The reduction in total uncompensated care
to net revenue is due to improved collections during fiscal 2009.
Other operating expenses. Other operating
expenses increased 7.6% to $90.6 million for fiscal 2009
from $84.2 million for fiscal 2008. This increase is mainly
driven by clinical and non-clinical contract services due to the
growth in volume at several of our facilities, particularly
emergency department visits, as well as increased maintenance
costs at our hospitals as machinery warranties have expired at
several of our facilities. These increases have been offset by a
decline in administrative contract services and collection
agency fees as these services are brought in-house to control
costs and gain efficiencies. In addition, we incurred a
$1.3 million increase in costs related to a new primary
care physician group at one of our hospitals.
Pre-opening expenses. We incurred
$3.6 million and $0.8 million in pre-opening expenses
during fiscal 2009 and 2008. Pre-opening expenses represent
costs specifically related to projects under development. As of
September 30, 2009 and 2008, we had one hospital under
development, Hualapai Medical Center in Kingman, Arizona, which
opened on October 15, 2009. The amount of pre-opening
expenses, if any, we incur in future periods will depend on the
nature, timing and size of our development activities.
Depreciation. Depreciation increased 5.1% to
$22.8 million for the fiscal year ended September 30,
2009 as compared to $21.7 million for the fiscal year ended
September 30, 2008. The increase in depreciation is the
direct result of expansion at several of our facilities as well
as the purchase of newer computer equipment to replace outdated
hardware.
Impairment of goodwill. Impairment of
long-lived assets increased 100.0% to $51.5 million for
fiscal 2009 as compared to zero for fiscal 2008. In fiscal 2009,
the Company recognized an impairment charge to write off its
goodwill which was all related to the Hospital Division due to
the overall financial performance of the Company and recent
appraisals indicating that the Hospital Divisions carrying
value was in excess of its fair value. Such analyses
48
resulted in an implied value of the goodwill as zero. There were
no such similar impairment charges recognized in fiscal 2008.
Interest expense. Interest expense decreased
66.7% to $3.7 million for fiscal 2009 compared to
$11.2 million for fiscal 2008. This $7.5 million
decrease in interest expense is primarily attributable to the
overall reduction in our outstanding debt, a decrease in the
interest rate on our outstanding debt, and the capitalization of
interest on our capital expansion projects. Capitalized interest
was $2.7 million for fiscal 2009 compared to
$1.3 million for fiscal 2008.
Loss on early extinguishment of debt. During
December 2008, we redeemed all of our outstanding
97/8% Senior
Notes for $111.2 million, which included the payment of a
repurchase premium of $5.0 million and accrued interest of
$4.2 million. The Senior Notes were redeemed through
borrowings under the Senior Secured Credit Facility and
available cash on hand. In addition, we incurred
$2.0 million in expenses related to the write-off of
previously incurred financing costs associated with the Senior
Notes. There was no loss on early extinguishment of debt for
fiscal 2008.
Interest and other income, net. Interest and
other income, net decreased 88.7% to $0.2 million for
fiscal 2009 compared to $1.9 million for fiscal 2008. The
decrease is a result of the decrease in cash balances and the
decrease in interest earned on cash balances during fiscal 2009.
Equity in net earnings of unconsolidated
affiliates. Equity in net earnings of
unconsolidated affiliates increased $1.2 million to
$9.1 million in fiscal 2009 from $7.9 million in
fiscal 2008. The increase is attributable to a $1.6 million
growth in earnings for our unconsolidated affiliates related to
our Partners Division offset by a reduction of $0.4 million
related to the Hospital Division. The increase for our Partners
Division is the result of a new minority owned venture that had
a full year of operations in fiscal 2009. The decline for our
Hospital Division is the result of an overall net decrease in
income from our two minority owned hospitals.
Net income attributable to noncontrolling
interest. Noncontrolling interest share of
earnings of consolidated subsidiaries decreased
$4.3 million in fiscal 2009 compared to fiscal 2008. The
decline is the result of an overall net decrease in income
before minority interest of certain of our established
hospitals. We expect our earnings allocated to minority
interests to fluctuate in future periods as we either recognize
disproportionate losses
and/or
recoveries thereof through disproportionate profit recognition.
Income tax (benefit) expense. Income tax
benefit was $(0.4) million for fiscal 2009 compared to an
income tax expense of $8.3 million for fiscal 2008, which
represented an effective tax rate of (0.8%) and 25.8%,
respectively. The fiscal 2009 effective rate is below our
federal statutory rate of 35.0% primarily due to the
non-deductibility for income tax purposes of a majority of the
$51.5 million impairment expense related to goodwill.
Income from discontinued operations, net of
taxes. Income from discontinued operations, net
of taxes, principally reflects the operating results of Heart
Hospital IV, LP (a/ka/ Heart Hospital of Austin,
HHA), Arizona Heart Hospital LLC (AzHH),
Dayton Heart Hospital, Cape Cod Cardiology Services LLC
(Cape Cod), Sun City Cardiac Center Associates
(Sun City) and the Heart Hospital of Lafayette. Net
income from discontinued operations was $9.5 million for
fiscal 2009 compared to $19.0 million for fiscal 2008.
Income from discontinued operations, net of taxes, includes the
gains on the sale of Cape Cod and Sun City during fiscal 2009
and income from operations of HHA, partially offset by operating
losses of other discontinued entities, principally losses at
AzHH. Income from discontinued operations, net of taxes, for
fiscal 2008 includes the gain recorded as a result of the sale
of certain assets of Dayton Heart Hospital, the income from
operations of HHA, Cape Cod and Sun City partially offset by
operating losses of Dayton Heart Hospital prior to the sale and
AzHH.
49
Selected
Quarterly Results of Operations
The following table sets forth quarterly consolidated operating
results for each of our last five quarters. We have prepared
this information on a basis consistent with our audited
consolidated financial statements and included all adjustments
that we consider necessary for a fair presentation of the data.
These quarterly results are not necessarily indicative of future
results of operations. This information should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
$
|
110,527
|
|
|
$
|
111,963
|
|
|
$
|
114,007
|
|
|
$
|
106,000
|
|
|
$
|
103,600
|
|
Impairment of long-lived assets and goodwill
|
|
|
29,257
|
|
|
|
22,813
|
|
|
|
14,752
|
|
|
|
|
|
|
|
51,500
|
|
Loss from operations
|
|
|
(29,547
|
)
|
|
|
(22,667
|
)
|
|
|
(13,366
|
)
|
|
|
(3,388
|
)
|
|
|
(54,616
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
397
|
|
|
|
2,262
|
|
|
|
3,092
|
|
|
|
1,516
|
|
|
|
2,013
|
|
Net income attributable to noncontrolling interest
|
|
|
(6,671
|
)
|
|
|
(2,354
|
)
|
|
|
(2,524
|
)
|
|
|
(840
|
)
|
|
|
(7,646
|
)
|
Loss from continuing operations, net of taxes
|
|
|
(25,722
|
)
|
|
|
(14,360
|
)
|
|
|
(9,351
|
)
|
|
|
(2,523
|
)
|
|
|
(53,214
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
4,034
|
|
|
|
1,544
|
|
|
|
(1,858
|
)
|
|
|
(133
|
)
|
|
|
(5,392
|
)
|
Net loss
|
|
$
|
(21,688
|
)
|
|
$
|
(12,816
|
)
|
|
$
|
(11,209
|
)
|
|
$
|
(2,656
|
)
|
|
$
|
(58,606
|
)
|
Earnings (loss) per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.29
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.70
|
)
|
Discontinued operations
|
|
|
0.20
|
|
|
|
0.08
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
$
|
(1.09
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.29
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.70
|
)
|
Discontinued operations
|
|
|
0.20
|
|
|
|
0.08
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
$
|
(1.09
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,898
|
|
|
|
19,897
|
|
|
|
19,829
|
|
|
|
19,743
|
|
|
|
19,740
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,898
|
|
|
|
19,897
|
|
|
|
19,829
|
|
|
|
19,743
|
|
|
|
19,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,113
|
|
|
$
|
12,273
|
|
|
$
|
15,373
|
|
|
$
|
3,535
|
|
|
$
|
9,805
|
|
Net cash provided by provided by (used in) investing activities
|
|
$
|
384
|
|
|
$
|
(1,996
|
)
|
|
$
|
(6,108
|
)
|
|
$
|
(9,236
|
)
|
|
$
|
858
|
|
Net cash (used in) financing activities
|
|
$
|
(4,509
|
)
|
|
$
|
(9,119
|
)
|
|
$
|
(5,960
|
)
|
|
$
|
(21,421
|
)
|
|
$
|
(1,871
|
)
|
Our results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to
quarterly fluctuations. Cardiovascular procedures can often be
scheduled ahead of time, permitting some patients to choose to
undergo the procedure at a time and location of their
preference. Some of the types of trends that we have experienced
in the past and may experience again in the future include:
|
|
|
|
|
the markets where some of our hospitals are located are
susceptible to seasonal population changes with part-time
residents living in the area only during certain months of the
year;
|
50
|
|
|
|
|
patients choosing to schedule procedures around significant
dates, such as holidays; and
|
|
|
|
physicians in the market where a hospital is located schedule
vacation from their practice during the summer months of the
year, around holidays and for various professional meetings held
throughout the world during the year.
|
To the extent these types of events occur in the future, as in
the past, we expect they will affect the quarterly results of
operations of our hospitals.
Liquidity
and Capital Resources
The cash provided by continuing operations from operating
activities decreased $15.6 million to $30.4 million
for fiscal 2010 from $46.0 million for fiscal 2009,
respectively. The decrease is primarily attributed to an
increase in outstanding net accounts receivable due to the
addition of Hualapai Mountain Medical Center, our new hospital
which opened during fiscal 2010 and an increase in net patient
revenues.
Our investing activities from continuing operations used net
cash of $14.9 million for fiscal 2010 compared to net cash
used of $82.1 million for fiscal 2009. Net cash used by
investing activities for fiscal 2009 was primarily capital
expenditures for the development of our hospital in Kingman,
Arizona and expansion projects at two of our existing hospitals.
There were no similar large scale expansions or developments in
fiscal 2010.
Our financing activities from continuing operations used net
cash of $31.8 million during fiscal 2010 compared to net
cash used of $43.8 million during fiscal 2009. The
$12.0 million decrease of net cash used for financing
activities is principally due to the net overall long-term debt
payments in fiscal 2009 related to the repurchase of our
outstanding Senior Notes as further discussed in Note 9 of
the consolidated financial statements included elsewhere in this
report.
Capital Expenditures. Cash paid for property
and equipment for fiscal years 2010 and 2009 was
$16.4 million and $87.0 million, respectively. The
decrease is primarily related to the development of our hospital
in Kingman, Arizona which opened in October 2009 and the
expansion projects at two of our existing hospitals, which were
completed during fiscal 2009. The cash paid for property and
equipment during fiscal year 2010 represents $8.0 million
related to payments on the completion of the hospital in
Kingman, Arizona and $8.4 million related to maintenance
capital expenditures.
Obligations, Commitments and Availability of
Financing. As described more fully in the notes
to our consolidated financial statements included elsewhere in
this report, we had certain cash obligations at
September 30, 2010, which are due as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
14,063
|
|
|
$
|
52,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
66,563
|
|
Obligations under capital leases
|
|
|
2,609
|
|
|
|
2,266
|
|
|
|
1,884
|
|
|
|
1,589
|
|
|
|
761
|
|
|
|
|
|
|
|
9,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
16,672
|
|
|
|
54,766
|
|
|
|
1,884
|
|
|
|
1,589
|
|
|
|
761
|
|
|
|
|
|
|
|
75,672
|
|
Other long-term obligations(1)
|
|
|
7,946
|
|
|
|
3,640
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,338
|
|
Interest on indebtedness
|
|
|
2,511
|
|
|
|
946
|
|
|
|
220
|
|
|
|
119
|
|
|
|
23
|
|
|
|
|
|
|
|
3,819
|
|
Operating leases
|
|
|
1,724
|
|
|
|
1,601
|
|
|
|
1,562
|
|
|
|
1,300
|
|
|
|
397
|
|
|
|
99
|
|
|
|
6,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,853
|
|
|
$
|
60,953
|
|
|
$
|
4,418
|
|
|
$
|
3,008
|
|
|
$
|
1,181
|
|
|
$
|
99
|
|
|
$
|
98,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term obligations include revenue guarantees related
to contracts for physician services or to physician recruiting
arrangements. In addition, the Company has deferred some of the
costs associated with these guarantees, see Note 12. |
During November 2008, we amended and restated our Senior Secured
Credit Facility (the Amended Credit Facility). The
Amended Credit Facility provides 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 includes a
$25.0 million
sub-limit
for the issuance of stand-by and commercial letters of credit
and a $10.0 million
sub-limit
51
for swing-line loans. At our request and approval from our
lenders, the aggregate amount available under the Amended Credit
Facility may be increased by an amount up to $50.0 million.
Borrowings under the Amended Credit Facility, excluding
swing-line loans, bear 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.
The Amended Credit Facility continues to be guaranteed jointly
and severally by us and certain of our existing and future,
direct and indirect, wholly owned subsidiaries and continues to
be secured by a first priority perfected security interest in
all of the capital stock or other ownership interests owned by
us and our subsidiary guarantors in each of their subsidiaries,
and, subject to certain exceptions in the Amended Credit
Facility, all other present and future assets and properties of
the MedCath and the subsidiary guarantors and all intercompany
notes.
The Amended Credit Facility requires 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 contains customary restrictions on, among
other things, our and our 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 entering into transactions with affiliates.
The Amended Credit Facility contains events of default,
including cross-defaults to certain indebtedness, change of
control events, and events of default customary for syndicated
commercial credit facilities. Upon the occurrence of an event of
default, we could be required to immediately repay all
outstanding amounts under the Amended Credit Facility.
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 asset 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. 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 provides for a reduction in
amount of the Revolver from $85 million to
$59.5 million as of the date of the First Amendment. Under
terms of the First Amendment, the fixed charge coverage ratio is
not tested at either September 30, 2010 or
December 31, 2010, and will be retested at the fiscal
quarter ending March 31, 2011 and subsequent fiscal
quarters. The maturity date of both the Term Loan and Revolver
is November 10, 2011.
During the third quarter of fiscal 2010, we repaid the remaining
$4.2 million note payable obligations to certain equipment
lenders on behalf of its consolidated subsidiary,
TexSan Heart Hospital.
During December 2008 we redeemed our outstanding
97/8% senior
notes (the Senior Notes) issued by MedCath Holdings
Corp., a wholly owned subsidiary for $111.2 million, which
included the payment of a repurchase premium of
$5.0 million and accrued interest of $4.2 million. The
Senior Notes were redeemed through borrowings under the Amended
Credit Facility and available cash on hand. In addition to the
aforementioned repurchase premium we incurred $2.0 million
in expense related to the write-off of previously incurred
financing costs associated with the Senior Notes. The repurchase
premium and write off of previously incurred financing costs
have been included in the consolidated statement of income as
loss on early extinguishment of debt.
52
At September 30, 2010, we had $75.7 million of
outstanding long-term debt and obligations under capital leases,
of which $16.7 million was classified as current. Our Term
Loan under our Amended Credit Facility had an outstanding amount
of $66.6 million as of September 30, 2010. The
remaining outstanding long-term debt and obligations under
capital leases of $9.1 million was due to various lenders
to our Hospital Division and MedCath Partners Division. No
amounts were outstanding under our Revolver. The maximum
availability under our Revolver is $59.5 million which was
reduced by outstanding letters of credit totaling
$1.7 million as of September 30, 2010.
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
September 30, 2009, TexSan Heart Hospital was in
violation of financial covenants which govern its equipment
loans outstanding. Accordingly, the total outstanding balance of
$6.1 million has been included in the current portion of
long-term debt and obligations under capital leases in our
consolidated balance sheet at that date. These loans were fully
repaid as of September 30, 2010. The covenant violations
did not result in any other non-compliance related to the
covenants governing our other outstanding debt arrangements. At
September 30, 2010 we were in compliance with all of our
covenants.
At September 30, 2010, we guaranteed either all or a
portion of the obligations of our subsidiary hospitals for
equipment. We provide these guarantees in accordance with the
related hospital operating agreements, and we receive a fee for
providing these guarantees from the hospitals or the physician
investors. Access to available borrowings under our Amended
Credit Facility is dependent on the Companys ability to
maintain compliance with the financial covenants contained in
the Amended Credit Facility. Deterioration in the Companys
operating results could result in failure to maintain compliance
with these covenants, which would restrict or eliminated access
to available funds.
See Note 9 to the consolidated financial statements
included elsewhere in this report for additional discussion of
the terms, covenants and repayment schedule surrounding our debt.
We believe that internally generated cash flows from operations
and asset sales will be sufficient to finance our strategic
plans, capital expenditures and our working capital requirements
for the next 12 to 18 months. Repayment of the outstanding
balance under our Amended Credit Facility prior to its November
2011 maturity date will be dependent on existing cash, cash flow
from operations and cash from asset sales.
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
13 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 3 to
7 years. The intercompany equipment loans accrue interest
at rates ranging from 4.87% to 8.58%. The weighted average
interest rate for the intercompany equipment loans at
September 30, 2010 was 7.21%.
We typically receive a fee from the minority partners in the
subsidiary hospitals as 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 often 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
53
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.
Because these intercompany notes receivable and related interest
income are eliminated with the corresponding notes payable and
interest expense at our consolidating hospitals in the process
of preparing our consolidated financial statements the amounts
outstanding under these notes do not appear in our consolidated
financial statements or accompanying notes. Information about
the aggregate amount of these notes outstanding from time to
time may be helpful, however, in understanding the amount of our
total investment in our hospitals. In addition, we believe
investors and others will benefit from a greater understanding
of the significance of the priority rights we have under these
intercompany notes receivable to distributions of cash by our
hospitals as funds are generated from future operations, a
potential sale of a hospital, or other sources. Because these
notes receivable are senior to the equity interests of MedCath
and our partners in each hospital, in the event of a sale of a
hospital, the hospital would be required first to pay to us any
balance outstanding under its intercompany notes prior to
distributing any of the net proceeds of the sale to any of the
hospitals equity investors as a return on their investment
based on their pro-rata ownership interests. Also, appropriate
payments to us to amortize principal balances outstanding and to
pay interest due under these notes are generally made to us from
a hospitals available cash flows prior to any pro-rata
distributions of a hospitals earnings to the equity
investors in the hospitals.
Retained Obligations Subsequent to
Disposition. Included in discontinued operations
are certain liabilities that the Company has retained upon the
disposition of the related entity, including those that have
been disposed since September 30, 2010. 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, obligations and wind down of the
respective tax filings of the partnership. The Company has
reported all known obligations in its consolidated balance
sheets as of September 30, 2010 and 2009. 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.
Off-Balance Sheet Arrangements. The
Companys off-balance sheet arrangements consist of
guarantees of consolidated and unconsolidated subsidiary
equipment loans and operating leases that are reflected in the
table above and as discussed in Notes 9 and 12,
respectively, in the consolidated financial statements.
Reimbursement,
Legislative and Regulatory Changes
Legislative and regulatory action has resulted in continuing
changes in reimbursement under the Medicare and Medicaid
programs that will continue to limit payments we receive under
these programs. Within the statutory framework of the Medicare
and Medicaid programs, there are substantial areas subject to
legislative and regulatory changes, administrative rulings,
interpretations, and discretion which may further affect
payments made under those programs, and the federal and state
governments may, in the future, reduce the funds available under
those programs or require more stringent utilization and quality
reviews of our hospitals or require other changes in our
operations. Additionally, there may be a continued rise in
managed care programs and future restructuring of the financing
and delivery of healthcare in the United States. These events
could have an adverse effect on our future financial results.
See Item 1A: Risk Factors Reductions or
changes in reimbursement from government or third-party payors
could adversely impact our operating results.
Inflation
The healthcare industry is labor intensive. Wages and other
expenses increase during periods of inflation and when labor
shortages, such as the growing nationwide shortage of qualified
nurses, occur in the marketplace. In addition, suppliers pass
along rising costs to us in the form of higher prices. We have
implemented cost control measures, including our case and
resource management program, to curb increases in operating
costs and expenses. We have, to date, offset increases in
operating costs by increasing reimbursement for services and
expanding services. However, we cannot predict our ability to
cover, or offset, future cost increases.
54
|
|
Item 7A.
|
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. Currently one of our hospitals in which we have a
minority interest and account for under the equity method
entered into an interest rate swap during fiscal 2006 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. Potential losses of
earnings and cash flows due to the market risk of the
aforementioned interest rate swap are immaterial.
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 Amended Credit Facility was
$66.6 million at September 30, 2010. A change of
100 basis points in the underlying interest rate would have
caused a change in interest expense of approximately
$0.7 million during the fiscal year ended
September 30, 2010.
55
INDEX TO
FINANCIAL STATEMENTS
MEDCATH
CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
Page
|
|
|
|
|
57
|
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
|
|
|
|
|
|
|
Page
|
|
|
|
|
96
|
|
FINANCIAL STATEMENTS:
|
|
|
|
|
|
|
|
97
|
|
|
|
|
98
|
|
|
|
|
99
|
|
|
|
|
100
|
|
|
|
|
101
|
|
56
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MedCath Corporation
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of
MedCath Corporation and subsidiaries (the Company)
as of September 30, 2010 and 2009, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period
ended September 30, 2010. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at September 30, 2010 and 2009, and the results of
its operations and its cash flows for each of the three years in
the period ended September 30, 2010, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for non-controlling interests effective October 1, 2009.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
September 30, 2010, based on Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated December 14, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
December 14, 2010
57
MEDCATH
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,835
|
|
|
$
|
28,267
|
|
Accounts receivable, net (See Note 6)
|
|
|
48,540
|
|
|
|
49,314
|
|
Income tax receivable
|
|
|
6,188
|
|
|
|
|
|
Medical supplies
|
|
|
13,481
|
|
|
|
13,001
|
|
Deferred income tax assets
|
|
|
13,327
|
|
|
|
12,161
|
|
Prepaid expenses and other current assets
|
|
|
13,583
|
|
|
|
13,077
|
|
Current assets of discontinued operations
|
|
|
38,356
|
|
|
|
61,045
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
168,310
|
|
|
|
176,865
|
|
Property and equipment, net (See Note 7)
|
|
|
223,182
|
|
|
|
302,717
|
|
Other assets
|
|
|
15,653
|
|
|
|
24,796
|
|
Deferred income tax assets
|
|
|
9,063
|
|
|
|
|
|
Non-current assets of discontinued operations
|
|
|
78,330
|
|
|
|
86,070
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
494,538
|
|
|
$
|
590,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities :
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19,267
|
|
|
$
|
26,838
|
|
Income tax payable
|
|
|
|
|
|
|
297
|
|
Accrued compensation and benefits
|
|
|
18,153
|
|
|
|
14,314
|
|
Other accrued liabilities
|
|
|
18,291
|
|
|
|
21,750
|
|
Current portion of long-term debt and obligations under capital
leases
|
|
|
16,672
|
|
|
|
21,074
|
|
Current liabilities of discontinued operations
|
|
|
28,130
|
|
|
|
32,358
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
100,513
|
|
|
|
116,631
|
|
Long-term debt
|
|
|
52,500
|
|
|
|
66,563
|
|
Obligations under capital leases
|
|
|
6,500
|
|
|
|
4,255
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
13,874
|
|
Other long-term obligations
|
|
|
5,053
|
|
|
|
8,533
|
|
Long-term liabilities of discontinued operations
|
|
|
35,968
|
|
|
|
36,062
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
200,534
|
|
|
|
245,918
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest (See Note 2)
|
|
|
11,534
|
|
|
|
7,448
|
|
|
|
|
|
|
|
|
|
|
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; 22,423,666 issued and 20,469,305 outstanding at
September 30, 2010 21,595,880 issued and 20,150,556 outstanding
at September 30, 2009
|
|
|
216
|
|
|
|
216
|
|
Paid-in capital
|
|
|
457,725
|
|
|
|
455,259
|
|
Accumulated deficit
|
|
|
(139,791
|
)
|
|
|
(91,420
|
)
|
Accumulated other comprehensive loss
|
|
|
(444
|
)
|
|
|
(360
|
)
|
Treasury stock, at cost; 1,954,361 shares at September 30,
2010 1,445,324 shares at September 30, 2009
|
|
|
(44,797
|
)
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
Total MedCath Corporation stockholders equity
|
|
|
272,909
|
|
|
|
318,898
|
|
Noncontrolling interest
|
|
|
9,561
|
|
|
|
18,184
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
282,470
|
|
|
|
337,082
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
494,538
|
|
|
$
|
590,448
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
MEDCATH
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
442,496
|
|
|
$
|
419,733
|
|
|
$
|
414,155
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
151,990
|
|
|
|
141,315
|
|
|
|
136,009
|
|
Medical supplies expense
|
|
|
113,588
|
|
|
|
111,253
|
|
|
|
104,616
|
|
Bad debt expense
|
|
|
46,887
|
|
|
|
39,068
|
|
|
|
33,070
|
|
Other operating expenses
|
|
|
104,327
|
|
|
|
90,603
|
|
|
|
84,230
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
3,563
|
|
|
|
786
|
|
Depreciation
|
|
|
26,895
|
|
|
|
22,818
|
|
|
|
21,714
|
|
Amortization
|
|
|
32
|
|
|
|
891
|
|
|
|
32
|
|
Impairment of long lived assets and goodwill
|
|
|
66,822
|
|
|
|
51,500
|
|
|
|
|
|
Loss on disposal of property, equipment and other assets
|
|
|
57
|
|
|
|
192
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
511,464
|
|
|
|
461,203
|
|
|
|
380,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(68,968
|
)
|
|
|
(41,470
|
)
|
|
|
33,574
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,548
|
)
|
|
|
(3,746
|
)
|
|
|
(11,242
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
|
|
Interest and other income
|
|
|
84
|
|
|
|
217
|
|
|
|
1,917
|
|
Loss on note receiveable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,267
|
|
|
|
9,057
|
|
|
|
7,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,296
|
|
|
|
(1,174
|
)
|
|
|
(1,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(67,672
|
)
|
|
|
(42,644
|
)
|
|
|
32,140
|
|
Income tax (benefit) expense
|
|
|
(26,662
|
)
|
|
|
(362
|
)
|
|
|
8,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(41,010
|
)
|
|
|
(42,282
|
)
|
|
|
23,844
|
|
Income from discontinued operations, net of taxes
|
|
|
5,028
|
|
|
|
9,527
|
|
|
|
19,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(35,982
|
)
|
|
|
(32,755
|
)
|
|
|
42,848
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
(12,389
|
)
|
|
|
(17,527
|
)
|
|
|
(21,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to MedCath Corporation
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to MedCath Corporation common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of taxes
|
|
$
|
(51,956
|
)
|
|
$
|
(51,655
|
)
|
|
$
|
10,645
|
|
Income from discontinued operations, net of taxes
|
|
|
3,585
|
|
|
|
1,373
|
|
|
|
10,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders
|
|
$
|
(2.62
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
0.53
|
|
Income from discontinued operations attributable to MedCath
Corporation common stockholders
|
|
|
0.18
|
|
|
|
0.07
|
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders
|
|
$
|
(2.62
|
)
|
|
$
|
(2.62
|
)
|
|
$
|
0.53
|
|
Income from discontinued operations attributable to MedCath
Corporation common stockholders
|
|
|
0.18
|
|
|
|
0.07
|
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
19,996
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
20,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
59
MEDCATH
CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
|
|
|
Total
|
|
|
Interest
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Noncontrolling
|
|
|
Equity
|
|
|
(Temporary
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Shares
|
|
|
Amount
|
|
|
Interest
|
|
|
(Permanent)
|
|
|
Equity)
|
|
|
Balance, September 30, 2007
|
|
|
21,271
|
|
|
$
|
213
|
|
|
$
|
447,688
|
|
|
$
|
(61,821
|
)
|
|
$
|
(62
|
)
|
|
|
69
|
|
|
$
|
(394
|
)
|
|
$
|
21,141
|
|
|
$
|
406,765
|
|
|
$
|
8,596
|
|
Cumulative impact of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
Exercise of stock options, including income tax benefit
|
|
|
282
|
|
|
|
3
|
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,744
|
|
|
|
|
|
Share buy back
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885
|
|
|
|
(44,403
|
)
|
|
|
|
|
|
|
(44,403
|
)
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,978
|
|
|
|
|
|
Tax impact of cancellation of stock options
|
|
|
|
|
|
|
|
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,913
|
)
|
|
|
|
|
Acquisitions and other transactions impacting noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344
|
|
|
|
344
|
|
|
|
(115
|
)
|
Distributions to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,152
|
)
|
|
|
(23,152
|
)
|
|
|
(4,005
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,290
|
|
|
|
38,280
|
|
|
|
4,568
|
|
Change in fair value of interest rate swaps, net of income tax
benefit(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
21,553
|
|
|
|
216
|
|
|
|
455,494
|
|
|
|
(41,138
|
)
|
|
|
(179
|
)
|
|
|
1,954
|
|
|
|
(44,797
|
)
|
|
|
15,623
|
|
|
|
385,219
|
|
|
|
9,044
|
|
Stock awards, including cancelations and income tax effects
|
|
|
43
|
|
|
|
|
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,826
|
)
|
|
|
|
|
Restricted stock awards, inlcuding cancelations
|
|
|
|
|
|
|
|
|
|
|
1,591
|
|
|
|
|
|
|
|
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
1,591
|
|
|
|
|
|
Distributions to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,436
|
)
|
|
|
(11,436
|
)
|
|
|
(4,895
|
)
|
Acquisitions and other transactions impacting noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
(118
|
)
|
|
|
(102
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,115
|
|
|
|
(36,167
|
)
|
|
|
3,401
|
|
Change in fair value of interest rate swaps, net of income tax
benefit(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,348
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
21,596
|
|
|
|
216
|
|
|
|
455,259
|
|
|
|
(91,420
|
)
|
|
|
(360
|
)
|
|
|
1,445
|
|
|
|
(44,797
|
)
|
|
|
18,184
|
|
|
|
337,082
|
|
|
|
7,448
|
|
Stock awards, including cancelations and income tax benefit
|
|
|
363
|
|
|
|
|
|
|
|
2,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,646
|
|
|
|
|
|
Tax withholdings for vested restricted stock awards
|
|
|
(44
|
)
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
Transfer of restricted shares from treasury stock
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,956
|
)
|
|
|
(14,956
|
)
|
|
|
(3,560
|
)
|
Acquisitions and other transactions impacting noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
72
|
|
|
|
(77
|
)
|
Sale of equity interest
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
140
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,234
|
|
|
|
(42,137
|
)
|
|
|
7,723
|
|
Change in fair value of interest rate swap, net of income tax
benefit(*)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,221
|
)
|
|
|
7,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
22,424
|
|
|
$
|
216
|
|
|
$
|
457,725
|
|
|
$
|
(139,791
|
)
|
|
$
|
(444
|
)
|
|
|
1,954
|
|
|
$
|
(44,797
|
)
|
|
$
|
9,561
|
|
|
$
|
282,470
|
|
|
$
|
11,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
|
Tax benefits were $0.1 million
for each of the years ended September 30, 2010, 2009 and
2008.
|
See notes to consolidated financial statements.
60
MEDCATH
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net (loss) income
|
|
$
|
(35,982
|
)
|
|
$
|
(32,755
|
)
|
|
$
|
42,848
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
|
(5,028
|
)
|
|
|
(9,527
|
)
|
|
|
(19,004
|
)
|
Bad debt expense
|
|
|
46,887
|
|
|
|
39,068
|
|
|
|
33,070
|
|
Depreciation
|
|
|
26,895
|
|
|
|
22,818
|
|
|
|
21,714
|
|
Amortization
|
|
|
32
|
|
|
|
891
|
|
|
|
32
|
|
Excess income tax benefit on stock awards and options
|
|
|
|
|
|
|
|
|
|
|
(608
|
)
|
Loss on disposal of property, equipment and other assets
|
|
|
57
|
|
|
|
192
|
|
|
|
124
|
|
Share-based compensation expense
|
|
|
3,148
|
|
|
|
2,390
|
|
|
|
4,978
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
6,702
|
|
|
|
|
|
Amortization of loan acquisition costs
|
|
|
994
|
|
|
|
937
|
|
|
|
828
|
|
Impairment of long-lived assets and goodwill
|
|
|
66,822
|
|
|
|
51,500
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
|
|
4,089
|
|
|
|
928
|
|
|
|
(224
|
)
|
Deferred income taxes
|
|
|
(22,982
|
)
|
|
|
(3,322
|
)
|
|
|
3,032
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(46,112
|
)
|
|
|
(30,248
|
)
|
|
|
(27,137
|
)
|
Medical supplies
|
|
|
(480
|
)
|
|
|
(3,093
|
)
|
|
|
(1,178
|
)
|
Prepaid and other assets
|
|
|
(6,854
|
)
|
|
|
(389
|
)
|
|
|
960
|
|
Accounts payable and accrued liabilities
|
|
|
(1,050
|
)
|
|
|
(27
|
)
|
|
|
(20,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing
operations
|
|
|
30,436
|
|
|
|
46,065
|
|
|
|
38,695
|
|
Net cash provided by operating activities of discontinued
operations
|
|
|
12,858
|
|
|
|
17,568
|
|
|
|
13,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
43,294
|
|
|
|
63,633
|
|
|
|
52,008
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(16,368
|
)
|
|
|
(86,990
|
)
|
|
|
(58,083
|
)
|
Proceeds from sale of property and equipment
|
|
|
611
|
|
|
|
1,750
|
|
|
|
975
|
|
Changes in cash restricted for investment
|
|
|
|
|
|
|
3,154
|
|
|
|
(3,154
|
)
|
Investments in affiliates
|
|
|
|
|
|
|
|
|
|
|
(9,530
|
)
|
Purchase of equity interest
|
|
|
|
|
|
|
|
|
|
|
(3,694
|
)
|
Sale of interest in equity method investment
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(14,921
|
)
|
|
|
(82,086
|
)
|
|
|
(73,486
|
)
|
Net cash (used in) provided by investing activities of
discontinued operations
|
|
|
(2,035
|
)
|
|
|
18,296
|
|
|
|
67,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(16,956
|
)
|
|
|
(63,790
|
)
|
|
|
(5,805
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
83,479
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(19,491
|
)
|
|
|
(116,300
|
)
|
|
|
(2,879
|
)
|
Repayments of obligations under capital leases
|
|
|
(1,951
|
)
|
|
|
(933
|
)
|
|
|
(945
|
)
|
Distributions to noncontrolling interest
|
|
|
(10,285
|
)
|
|
|
(10,294
|
)
|
|
|
(16,366
|
)
|
Investment by noncontrolling interest
|
|
|
109
|
|
|
|
207
|
|
|
|
|
|
Sale of equity interest in subsidiary
|
|
|
140
|
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
|
77
|
|
|
|
4,317
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
|
|
|
|
(44,403
|
)
|
Tax withholding of vested restricted stock awards
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
Excess income tax benefit on stock awards and options
|
|
|
|
|
|
|
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(31,771
|
)
|
|
|
(43,764
|
)
|
|
|
(59,668
|
)
|
Net cash used in financing activities of discontinued operations
|
|
|
(9,238
|
)
|
|
|
(6,446
|
)
|
|
|
(18,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(41,009
|
)
|
|
|
(50,210
|
)
|
|
|
(78,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(14,671
|
)
|
|
|
(50,367
|
)
|
|
|
(31,825
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
61,701
|
|
|
|
112,068
|
|
|
|
143,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
47,030
|
|
|
$
|
61,701
|
|
|
$
|
112,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
|
34,835
|
|
|
|
28,267
|
|
|
|
92,844
|
|
Cash and cash equivalents of discontinued operations
|
|
|
12,195
|
|
|
|
33,434
|
|
|
|
19,224
|
|
See notes to consolidated financial statements.
61
MEDCATH
CORPORATION
(All
tables in thousands, except per share amounts)
|
|
1.
|
Business
and Organization
|
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
September 30, 2010, the Company had ownership interests in
and operated ten hospitals, including eight in which the Company
owned a majority interest.
As noted below under Our Strategic Options
Review, subsequent to year end the Company sold two of
its majority owned hospitals that were classified as
discontinued operations as of September 30, 2010 and its
equity interests in one of its minority owned hospitals. As a
result, the Company currently owns interests in seven hospitals.
In addition, the Company has an agreement to sell one of the
seven remaining 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
our hospitals has a
24-hour
emergency room staffed by emergency department physicians.
During May 2009 the Company completed a 79 licensed bed
expansion at Louisiana Medical Center and Heart Hospital
(LMCHH) and built space for an additional 40 beds at
that hospital. During October 2009, the Company opened a new
acute care hospital, Hualapai Mountain Medical Center
(HMMC), in Kingman, Arizona. This hospital is
designed to accommodate a total of 106 licensed beds, with an
initial opening of 70 of its licensed beds. The hospitals in
which the Company had an ownership interest as of
September 30, 2010 had a total of 825 licensed beds, 117 of
which are related to Arizona Heart Hospital (AzHH)
and Heart Hospital of Austin (HHA) whose assets,
liabilities, and operations are included within discontinued
operations. AzHH and HHA were sold on October 1, 2010 and
November 1, 2010, respectively. The Companys seven
hospitals that currently comprise continuing operations have 653
licensed beds and are located in six states: Arizona, Arkansas,
California, Louisiana, New Mexico, and Texas.
In addition to the hospitals, the Company currently owns
and/or
manages eight cardiac diagnostic and therapeutic facilities.
Seven of these facilities are 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 refers to its diagnostics division as MedCath
Partners. For financial data and other information of this
and other segments of our business see Note 20.
The Company accounts for all but two of its owned and operated
hospitals as consolidated subsidiaries. The Company owns a
noncontrolling interest in the Avera Heart Hospital of South
Dakota (which was sold on October 1, 2010) and
Harlingen Medical Center as of September 30, 2010.
Therefore, the Company is unable to consolidate these
hospitals results of operations and financial position,
but rather is required to account for its noncontrolling
interests in these hospitals as equity investments.
During fiscal 2010, the Company entered into definitive
agreements or sold its interests in AzHH, HHA and certain assets
of the MedCath Partners Division. During fiscal 2009 the Company
sold its equity interest in Cape Cod Cardiology Services, LLC
(Cape Cod) and the net assets of Sun City Cardiac
Center Associates (Sun City). During fiscal 2008,
the Company sold its equity interest in Heart Hospital of
Lafayette and certain assets of Dayton Heart Hospital. The
results of operations of these entities are reported as
discontinued operations for all periods presented. The Company
uses judgment in determining whether an entity will be reported
as continuing or discontinued operations under the provisions of
accounting principles generally accepted in the United States
(GAAP). Such judgments include whether an entity
will be sold, the period required to complete the disposition
and the likelihood of changes to a plan for sale. If in future
periods the Company determines that an entity should be either
reclassified from continuing operations to discontinued
operations or from discontinued operations to continuing
operations, previously reported consolidated statements of
income are reclassified in order to reflect the current
classification. See Note 3.
62
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 its 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 Arizona Heart Hospital (Phoenix, Arizona) 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.
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|
|
|
The disposition of the Companys wholly owned subsidiary
that held 33.3% ownership of Avera Heart Hospital of South
Dakota located in 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 Heart Hospital of Austin (Texas) 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.
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|
|
|
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.
|
In addition, the Company announced on November 8, 2010,
that it, along with physician investors, had entered into a
definitive agreement to sell substantially all the assets of
TexSan Heart Hospital (San Antonio, Texas) to
Methodist Healthcare System of San Antonio for
$76.25 million, plus retained working capital. The
transaction, which is subject to regulatory approval and other
customary closing conditions, is anticipated to close during the
second quarter of fiscal 2011, which ends March 31, 2011.
This facility does not qualify for discontinued operations
treatment at September 30, 2010.
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|
2.
|
Summary
of Significant Accounting Policies and Estimates
|
Changes in Basis of Presentation Effective
October 1, 2009, the Company adopted a new accounting
standard which establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by
parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interests,
changes in a parents ownership interest and the valuation
of any retained noncontrolling equity investment when a
subsidiary is deconsolidated. This new accounting standard also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. This new accounting
standard generally requires the Company to clearly identify and
present ownership interests in subsidiaries held by parties
other than the Company in the consolidated financial statements
within the equity section but separate from the Companys
equity. However, in instances in which certain redemption
features that are not solely within the control of the issuer
are present, classification of noncontrolling interests outside
of permanent equity is required. It also requires the amounts of
consolidated net income attributable to the Company and to the
noncontrolling interests to be clearly identified and presented
on the face of the consolidated statements of operations;
changes in ownership interests to be accounted for as equity
transactions; and when a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former
subsidiary and the gain or loss on the deconsolidation of the
subsidiary to be measured at fair value. The implementation of
this accounting standard results in the cash flow impact of
certain transactions with noncontrolling interests being
classified within financing activities. Such treatment is
consistent with the view that under this new accounting
standard, transactions between the Company and noncontrolling
interests are considered to be equity transactions. The adoption
of this new accounting standard has been applied retrospectively
for all periods presented.
63
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon the occurrence of certain fundamental regulatory changes,
the Company could be obligated, under the terms of certain of
its investees operating agreements, to purchase some or
all of the noncontrolling interests related to certain of the
Companys subsidiaries. While the Company believes that the
likelihood of a change in current law that would trigger such
purchases was remote as of September 30, 2010, the
occurrence of such regulatory changes is outside the control of
the Company. As a result, these noncontrolling interests
totaling $11,534 and $7,448 as of September 30, 2010 and
2009, respectively, that are subject to this redemption feature
are not included as part of the Companys equity and are
carried as redeemable noncontrolling interests in equity of
consolidated subsidiaries on the Companys consolidated
balance sheets.
Profits and losses are allocated to the noncontrolling interest
in the Companys subsidiaries in proportion to their
ownership percentages and reflected in the aggregate as net
income attributable to noncontrolling interests. The physician
partners of the Companys subsidiaries typically are
organized as general partnerships, limited partnerships or
limited liability companies that are not subject to federal
income tax. Each physician partner shares in the pre-tax
earnings of the subsidiary in which it is a partner.
Accordingly, the income or loss attributable to noncontrolling
interests in each of the Companys subsidiaries are
generally determined on a pre-tax basis. In accordance with this
new accounting standard, total net income attributable to
noncontrolling interests are presented after net (loss) income.
Basis of Consolidation The consolidated
financial statements include the accounts of the Company and its
subsidiaries that are wholly and majority owned
and/or over
which it exercises substantive control, including variable
interest entities in which the Company is the primary
beneficiary. All intercompany accounts and transactions have
been eliminated in consolidation. The Company uses the equity
method of accounting for entities, including variable interest
entities, in which the Company holds less than a 50% interest,
has significant influence but does not have control, and is not
the primary beneficiary.
Use of Estimates The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities, revenues and expenses and related disclosures
of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. There is a
reasonable possibility that actual results may vary
significantly from those estimates.
Concentrations of Credit Risk Financial
instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash
equivalents and accounts receivable. Cash and cash equivalents
are maintained with several large financial institutions.
Deposits held with financial institutions typically exceed the
insurance provided by the Federal Deposit Insurance Corporation.
The Company has not experienced any losses on its deposits of
cash and cash equivalents.
The Company grants credit without collateral to its patients,
most of whom are insured under payment arrangements with third
party payors, including Medicare, Medicaid and commercial
insurance carriers. The Company has not experienced significant
losses related to receivables from individual patients or groups
of patients in any particular industry or geographic area.
Accounts receivable of the Hospital Division represents 96.2%
and 90.3% of total accounts receivable for the Company as of
September 30, 2010 and 2009, respectively. The following
table summarizes the percentage of net accounts receivable from
all payors for the Hospital Division at September 30:
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|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Medicare and Medicaid
|
|
|
46
|
%
|
|
|
42
|
%
|
Commercial and other
|
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|
42
|
%
|
|
|
43
|
%
|
Self-pay
|
|
|
12
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
64
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents The Company
considers currency on hand, demand deposits, and all highly
liquid investments with an original maturity of three months or
less at the date of purchase to be cash and cash equivalents.
Allowance for Doubtful Accounts Accounts
receivable primarily consist of amounts due from third-party
payors and patients in the Companys Hospital Division. The
remainder of the Companys accounts receivable principally
consists of amounts due from billings to hospitals for various
cardiovascular care services performed in its MedCath Partners
Division. To provide for accounts receivable that could become
uncollectible in the future, the Company establishes an
allowance for doubtful accounts to reduce the carrying value of
such receivables to their estimated net realizable value. The
Company estimates this allowance based on such factors as payor
mix, aging and the historical collection experience and
write-offs of its respective hospitals and other business units.
Medical Supplies Medical supplies consist
primarily of supplies necessary for diagnostics, catheterization
and surgical procedures and general patient care and are stated
at the lower of
first-in,
first-out cost or market.
Property and Equipment Property and equipment
are recorded at cost and are depreciated principally on a
straight-line basis over the estimated useful lives of the
assets, which generally range from 25 to 40 years for
buildings and improvements, 15 to 25 years for land
improvements, and from 3 to 10 years for equipment,
furniture and software. Repairs and maintenance costs are
charged to operating expense while betterments are capitalized
as additions to the related assets. Retirements, sales, and
disposals are recorded by removing the related cost and
accumulated depreciation with any resulting gain or loss
reflected in income from operations. Amortization of property
and equipment recorded under capital leases is included in
depreciation expense. Interest expense incurred in connection
with the construction of hospitals is capitalized as part of the
cost of construction until the facility is operational, at which
time depreciation begins using the straight-line method over the
estimated useful life of the applicable constructed assets. The
Company did not capitalize interest during the year ended
September 30, 2010. The Company capitalized interest of
$2.7 million and $1.3 million, respectively, during
the years ended September 30, 2009 and 2008.
Goodwill Goodwill represents acquisition
costs in excess of the fair value of net identifiable tangible
and intangible assets of businesses purchased. All of the
Companys goodwill was recorded within the Hospital
Division segment, see Note 20. The Company evaluated
goodwill annually on September 30 for impairment, or earlier if
indicators of potential impairment exist. The determination of
whether or not goodwill has become impaired involves a
significant level of judgment in the assumptions underlying the
approach used to determine the value of the Companys
reporting unit. See Note 4 for additional disclosure
related to the Companys annual impairment evaluation of
goodwill.
Other Assets Other assets primarily consist
of investments in affiliates (see Note 8), loan acquisition
costs and assets associated with management contracts and
physician related revenue guarantees (see Note 12). Loan
acquisition costs (Loan Costs) are costs associated
with obtaining long-term financing. Loan Costs, net of
accumulated amortization, were $1.1 million and
$2.1 million as of September 30, 2010 and 2009,
respectively. Loan Costs are being amortized using the
straight-line method, which approximates the effective interest
method, as a component of interest expense over the life of the
related debt. Amortization expense recognized for Loan Costs
totaled $1.0 million, $1.0 million, and
$0.9 million for the years ended September 30, 2010,
2009 and 2008, respectively.
Long-Lived Assets Long-lived assets, such as
property, 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 by management through various valuation
techniques including, but not limited to, discounted cash
65
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
flow models, quoted market comparables and third party
indications of value obtained in conjunction with the
Companys evaluation of Strategic Alternatives. 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. 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.
See Note 4 for the impairment charges recorded to property
and equipment and Note 13 for further discussions as to the
Companys determination of fair value.
Other Long-Term Obligations Other long-term
obligations consist of physician revenue guarantees and other
long term contracts. See Note 12 for further discussion of
these physician guarantees.
Market Risk Policy The Companys policy
for managing risk related to its exposure to variability in
interest rates, commodity prices, and other relevant market
rates and prices includes consideration of 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 its risks. In addition, the Company may be
required to hedge some or all of its market risk exposure,
especially to interest rates, by creditors who provide debt
funding to the Company. The Company recognizes all derivatives
as either assets or liabilities on the balance sheets and
measures those instruments at fair value.
Comprehensive Income (Loss) Comprehensive
income or loss is the change in equity of a business enterprise
during a period from transactions and other events and
circumstances from non-owner sources.
Revenue Recognition Amounts the Company
receives for treatment of patients covered by governmental
programs such as Medicare and Medicaid and other third-party
payors such as commercial insurers, health maintenance
organizations and preferred provider organizations are generally
less than established billing rates. Payment arrangements with
third-party payors may include prospectively determined rates
per discharge or per visit, a discount from established charges,
per diem payments, reimbursed costs (subject to limits)
and/or other
similar contractual arrangements. As a result, net revenue for
services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. The Company
accounts for the differences between the estimated realizable
rates under the reimbursement program and the standard billing
rates as contractual adjustments.
The majority of the Companys contractual adjustments are
system-generated at the time of billing based on either
government fee schedules or fee schedules contained in managed
care agreements with various insurance plans. Portions of the
Companys contractual adjustments are performed manually
and these adjustments primarily relate to patients that have
insurance plans with whom the Companys hospitals do not
have contracts containing discounted fee schedules, also
referred to as non-contracted payors, and patients that have
secondary insurance plans following adjudication by the primary
payor. Estimates of contractual adjustments are made on a
payor-specific basis and based on the best information available
regarding the Companys interpretation of the applicable
laws, regulations and contract terms. While subsequent
adjustments to the systematic contractual allowances can arise
due to denials, short payments deemed immaterial for continued
collection effort and a variety of other reasons, such amounts
have not historically been significant.
The Company continually reviews the contractual estimation
process to consider and incorporate updates to the laws and
regulations and any changes in the contractual terms of its
programs. Final settlements under some of these programs are
subject to adjustment based on audit by third parties, which can
take several years to determine. From a procedural standpoint,
for governmental payors, primarily Medicare, the Company
recognizes estimated settlements in its consolidated financial
statements based on filed cost reports. The Company subsequently
adjusts those settlements as new information is obtained from
audits or reviews by the fiscal intermediary and, if the result
of the fiscal intermediary audit or review impacts other
unsettled and open cost reports, the Company recognizes the
impact of those adjustments. As such, the Company recognized
adjustments that decreased net revenue by $0.3 million,
$5.1 million and $0.7 million for continuing
operations in the years ended September 30, 2010, 2009
66
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and 2008, respectively. The Company recognized adjustments that
decreased net revenue by $0.1 million and $0.9 million
for discontinued operations in the years ended
September 30, 2009 and 2008, respectively. The Company
recognized immaterial adjustments to net revenue for
discontinued operations for the year ended September 30,
2010.
The Company records charity care deductions as a reduction to
gross revenue. Patients that receive charity care discounts must
provide a complete and accurate application, be in need of
non-elective care and meet certain federal poverty guidelines
established by the U.S. Department of Health and Human
Services.
A significant portion of the Companys net revenue is
derived from federal and state governmental healthcare programs,
including Medicare and Medicaid, which, combined, accounted for
55.5%, 54.3% and 55.3% of the Companys net revenue during
the years ended September 30, 2010, 2009 and 2008,
respectively. Medicare payments for inpatient acute services and
certain outpatient services are generally made pursuant to a
prospective payment system. Under this system, hospitals are
paid a prospectively-determined fixed amount for each hospital
discharge based on the patients diagnosis. Specifically,
each discharge is assigned to a diagnosis-related group
(DRG). Based upon the patients condition and
treatment during the relevant inpatient stay, each DRG is
assigned a fixed payment rate that is prospectively set using
national average costs per case for treating a patient for a
particular diagnosis. The DRG rates are adjusted by an update
factor each federal fiscal year, which begins on October 1.
The update factor is determined, in part, by the projected
increase in the cost of goods and services that are purchased by
hospitals, referred to as the market basket index. DRG payments
do not consider the actual costs incurred by a hospital in
providing a particular inpatient service; however, DRG payments
are adjusted by a predetermined adjustment factor assigned to
the geographic area in which the hospital is located.
While hospitals generally do not receive direct payment in
addition to a DRG payment, hospitals may qualify for additional
capital-related cost reimbursement and outlier payments from
Medicare under specific circumstances. In addition, some
hospitals with high levels of low income patients qualify for
Medicare Disproportionate Share Hosptial (DSH)
reimbursement as an add on to DRG payments. Medicare payments
for most outpatient services are based on prospective payments
using ambulatory payment classifications (APCs).
Other outpatient services, including outpatient clinical
laboratory, are reimbursed through a variety of fee schedules.
The Company is reimbursed for DSH payments and cost-reimbursable
items at tentative rates, with final settlement determined after
submission of annual cost reports by the Company and audits
thereof by the Medicare fiscal intermediary.
Medicaid payments for inpatient and outpatient services are
based upon methodologies specific to the state in which
hospitals are located and are made at prospectively determined
amounts, such as DRGs; reasonable costs or charges; or fee
schedule. Depending upon the state in which hospitals are
located, Medicaid payments may be made at tentative rates with
final settlement determined after submission of annual cost
reports by the hospitals and audits or reviews thereof by the
states Medicaid agencies.
The Companys managed diagnostic and therapeutic facilities
and mobile cardiac catheterization laboratories operate under
various contracts where management fee revenue is recognized
under fixed-rate and
percentage-of-income
arrangements as services are rendered. In addition, certain
diagnostic and therapeutic facilities and mobile cardiac
catheterization laboratories recognize additional revenue under
cost reimbursement and equipment lease arrangements. Net revenue
from the Companys owned diagnostic facility and mobile
cardiac catheterization laboratories is reported at the
estimated net realizable amounts due from patients, third-party
payors, and others as services are rendered, including estimated
retroactive adjustments under reimbursement agreements with
third-party payors.
Segment Reporting. Operating segments are
components of an enterprise about which separate financial
information is available and evaluated regularly by the chief
operating decision maker in deciding how to allocate resources
and evaluate performance. Two or more operating segments may be
aggregated into a single reportable segment if the segments have
similar economic and overall industry characteristics, such as
customer class, products and service. There is no aggregation
within the Companys reportable segments. The description
of the
67
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys reportable segments, consistent with how business
results are reported internally to management and the disclosure
of segment information is discussed in Note 20.
Advertising Advertising costs are expensed as
incurred. During the years ended September 30, 2010, 2009
and 2008, the Company incurred $2.2 million,
$2.6 million and $2.0 million of advertising expenses,
respectively.
Pre-opening Expenses Pre-opening expenses
consist of operating expenses incurred during the development of
new ventures prior to opening for business. Such costs
specifically relate to the Companys development of the
Hualapai Mountain Medical Center in Kingman, Arizona and are
expensed as incurred. The Company incurred $0.9 million,
$3.6 million and $0.8 million, respectively, of
pre-opening expenses during the years ended September 30,
2010, 2009 and 2008.
Income Taxes Income taxes are computed on the
pretax income based on current tax law. Deferred income taxes
are recognized for the expected future tax consequences or
benefits of differences between the tax bases of assets or
liabilities and their carrying amounts in the consolidated
financial statements. A valuation allowance is provided for
deferred tax assets if it is more likely than not that these
items will either expire before the Company is able to realize
their benefit or that future deductibility is uncertain.
Members and Partners Share of Hospitals Net
Income and Loss Each of the Companys
consolidated hospitals is organized as a limited liability
company or limited partnership, with one of the Companys
wholly-owned subsidiaries serving as the manager or general
partner and holding from 53.3% to 89.2% of the ownership
interest in the entity. In most cases, physician partners or
members own the remaining ownership interests as members or
limited partners. In some instances, the Company may organize a
hospital with a community hospital investing as an additional
partner or member. In those instances, the Company may hold a
noncontrolling interest in the hospital with the community
hospital and physician partners owning the remaining interests
also as noncontrolling interest partners. In such instances, the
hospital is accounted for under the equity method of accounting.
Profits and losses of hospitals accounted for under either the
consolidated or equity methods are allocated to their owners
based on their respective ownership percentages. If the
cumulative losses of a hospital exceed its initial
capitalization and committed capital obligations of the partners
or members, the Company will recognize a disproportionate share
of the hospitals losses that otherwise would be allocated
to all of its owners on a pro rata basis. In such cases, the
Company will recognize a disproportionate share of the
hospitals future profits to the extent the Company has
previously recognized a disproportionate share of the
hospitals losses.
Share-Based Compensation Compensation expense
for share-based 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 share-based payment awards on the date of grant
using, either an option-pricing model for stock options or the
closing market value of the Companys stock for restricted
stock and restricted stock units, and expenses the value of the
portion of the award that is ultimately expected to vest over
the requisite service period in the Companys statement of
operations.
The Company used the Black-Scholes option pricing model with the
range of weighted-average assumptions used for option grants
noted in the following table. The expected life of the stock
options represents the period of time that options granted are
expected to be outstanding and the range given below results
from certain groups of employees exhibiting different behavior
with respect to the options granted to them and has been
determined based on an annual analysis of historical and
expected exercise and cancellation behavior. The risk-free
interest rate is based on the US Treasury yield curve in effect
on the date of the grant. The expected volatility is based on
the
68
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
historical volatilities of the Companys common stock and
the common stock of comparable publicly traded companies.
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2009
|
|
2008
|
|
Expected life
|
|
5-8 years
|
|
5-8 years
|
Risk- free interest rate
|
|
1.36-3.59%
|
|
2.34-4.56%
|
Expected volatility
|
|
44-49%
|
|
33-41%
|
Stock options awarded to employees are fully vested at the time
of grant, with the condition that the optionee is prohibited
from selling the share of stock acquired upon exercise of the
option for a specified period of time. As a result, total
share-based compensation is recorded for stock options on the
option grant date.
During fiscal 2010 and 2009 the Company granted shares of
restricted stock and restricted stock units to employees and
directors, respectively. Restricted stock granted to employees,
excluding executives of the Company, vest in equal annual
installments over a three year period. Executives of the Company
defined by the Company as vice president or higher, received two
separately equal grants. The first grant of restricted stock
vests in equal annual installments over a three year period, the
second grant of restricted stock vests over a three year period
based on established performance conditions. 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. Restricted
stock units granted to directors are fully vested at the date of
grant and are paid in the form of common stock upon each
applicable directors termination of service on the board.
Subsequent Events In connection with
preparation of the consolidated financial statements for fiscal
year ended September 30, 2010, the Company has evaluated
subsequent events for potential recognition and disclosures
through the date these consolidated financial statements were
issued, as filed in
Form 10-K
with the Securities and Exchange Commission (SEC).
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 In
December 2007, the FASB issued a new accounting standard that
establishes accounting and reporting standards pertaining to
ownership interests in subsidiaries held by parties other than
the parent, the amount of net income attributable to the parent
and to the noncontrolling interests, changes in a parents
ownership interest, and the valuation of any retained
noncontrolling equity investment when a subsidiary is
deconsolidated. This new accounting standard also establishes
disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the
noncontrolling owners. The Company adopted this new standard on
October 1, 2009. Upon adoption, a portion of noncontrolling
interests was reclassified to a separate component of total
equity within our consolidated balance sheets.
In April 2008, the FASB issued a new accounting standard which
amends the list of factors an entity should consider in
developing renewal or extension assumptions used in determining
the useful life of recognized intangible assets. The new
accounting standard applies to intangible assets that are
acquired individually or with a group of other assets and
intangible assets acquired in both business combinations and
asset acquisitions. The Company adopted this new standard on
October 1, 2009 with no impact to its consolidated
financial statements.
Effective the first quarter of fiscal 2009, the Company adopted
a new accounting standard issued by the FASB that defines fair
value, establishes a framework for measuring fair value and
enhances disclosures about fair value measures required under
other accounting pronouncements, but does not change existing
guidance as to whether or not an instrument is carried at fair
value. In February 2008, the FASB delayed the effective date of
this new standard for all nonfinancial assets and liabilities,
except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). The Company elected to defer implementation of this
standard
69
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
until October 1, 2009 as it relates to the Companys
non-financial assets and non-financial liabilities that are not
permitted or required to be measured at fair value on a
recurring basis. The Company adopted this standard on
October 1, 2009 with no impact to its consolidated
financial statements. See Note 13.
Recent
Accounting Pronouncements:
In June 2009, the FASB issued a new accounting standard that
amends the consolidation guidance that applies to variable
interest entities (VIE). The amendments will
significantly affect the overall consolidation analysis. The
provisions of this new 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. This new accounting standard is
effective as of the beginning of the first fiscal year after
November 15, 2009, fiscal 2011 for the Company. The
adoption of this standard is not expected to have any impact on
our consolidated financial position or results of operations.
In August 2010, 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.
In December 2010, the FASB approved the issuance of an ASU
whereby a health care entity is required to present the
provision for bad debts as a component of net revenues within
the revenue section of the statement of operations. However, on
December 8, 2010, due to implementation and operational
concerns, the FASB decided to re-expose the issue for a
60-day
comment period. As currently drafted, a health care entity is
required to disclose the following by major payor sources of
revenue:
a. Its policy for considering collectability in the timing
and amount of revenue and bad debt recognized
b. Patient service revenue (net of contractual allowances
and discounts) before any provision for bad debts
c. A tabular reconciliation, describing the material
activity in the allowance for doubtful accounts for the period.
Public entities will be required to provide the new disclosures
and statement of operations presentation in fiscal years
beginning after December 15, 2010, and interim periods
within those years, with early adoption permitted. Nonpublic
entities will be required to provide the new disclosures and
statement of operations presentation in fiscal years beginning
after December 15, 2011, with early adoption permitted. The
requirement to report the provision for bad debts as a component
of net revenue will be applied retrospectively for all periods
presented, while the new disclosure requirements will be applied
prospectively. The Company is evaluating the potential impacts
the adoption of this ASU will have on our financial statements.
|
|
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
70
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
within current and non-current assets and current and long-term
liabilities of discontinued operations on the consolidated
balance sheets.
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 July, August and September 2010, the MedCath Partners
Division of the Company sold or entered into agreements to sell
certain assets of the Division, which, net of taxes resulted in
immaterial losses. The associated losses from these sales that
have closed as of September 30, 2010 have been included in
income (loss) from discontinued operations on the consolidated
statement of operations for the year ended September 30,
2010.
During August 2010, the Company entered into a definitive
agreement to sell certain of the hospital assets, 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. The
final purchase price is subject to certain post-closing working
capital and other adjustments. As part of its assessment of
long-lived assets in June 2010, the Company recognized an
impairment charge of $5.2 million based on the potential
sales value of AzHH. Accordingly, the Company expects to
recognize a nominal gain/loss on the sale in fiscal 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.
During September 2009, the MedCath Partners Division of the
Company sold the assets of Sun City for $16.9 million,
which resulted in a gain of $3.2 million, net of taxes. The
associated gain from the sale has been included in income (loss)
from discontinued operations on the consolidated statement of
operations for the year ended September 30, 2009.
During December 2008, the MedCath Partners Division of the
Company sold its equity interest in Cape Cod for
$6.9 million, which resulted in a gain of
$4.0 million, net of taxes. The associated gain from the
sale has been included in income (loss) from discontinued
operations on the consolidated statement of operations for the
year ended September 30, 2009.
During May 2008, the Hospital Division of the Company sold the
net assets of Dayton Heart Hospital (DHH) to Good
Samaritan Hospital for $47.5 million pursuant to a
definitive agreement. The total gain recognized, net of taxes,
was $3.4 million and is included in income (loss) from
discontinued operations on the consolidated statement of
operations for the year ended September 30, 2008. As part
of the gain resulting from the disposition of DHH,
$4.6 million of goodwill was written off.
In accordance with the terms of the sale, DHH and Good Samaritan
Hospital entered into an indemnification agreement for a period
of eighteen months from the date of the sale. DHH agreed to
indemnify Good Samaritan Hospital from certain exposures arising
subsequent to the date of sale, including environmental exposure
and exposure resulting from the breach of representations or
warranties made in accordance with the sale. The indemnification
period expired in November 2010 without the Company incurring
any payments under this agreement.
As of September 30, 2010 and 2009 the Company had reserved
$9.8 million and $9.6 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.
During fiscal 2007, the Company entered into an agreement to
dispose of its interest in the Heart Hospital of Lafayette
(HHLf). The sale of HHLf was completed during the
year ended September 30, 2008, resulting in an
71
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
immaterial loss recorded as part of income (loss) from
discontinued operations for the year ended September 30,
2008.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
169,757
|
|
|
$
|
195,778
|
|
|
$
|
235,453
|
|
Gain (loss) from dispositions, net
|
|
|
(151
|
)
|
|
|
12,055
|
|
|
|
3,399
|
|
Income before income taxes
|
|
|
2,462
|
|
|
|
16,655
|
|
|
|
21,588
|
|
Income tax (benefit) expense
|
|
|
(2,566
|
)
|
|
|
7,128
|
|
|
|
2,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,028
|
|
|
|
9,527
|
|
|
|
19,004
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
(1,443
|
)
|
|
|
(8,154
|
)
|
|
|
(8,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to MedCath Corporation
|
|
$
|
3,585
|
|
|
$
|
1,373
|
|
|
$
|
10,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash and cash equivalents
|
|
$
|
12,195
|
|
|
$
|
33,434
|
|
Accounts receivable, net
|
|
|
18,868
|
|
|
|
21,419
|
|
Other current assets
|
|
|
7,293
|
|
|
|
6,192
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
$
|
38,356
|
|
|
$
|
61,045
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
74,711
|
|
|
$
|
83,209
|
|
Other intangible assets, net
|
|
|
|
|
|
|
37
|
|
Other assets
|
|
|
3,619
|
|
|
|
2,824
|
|
|
|
|
|
|
|
|
|
|
Long-term assets of discontinued operations
|
|
$
|
78,330
|
|
|
$
|
86,070
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
21,828
|
|
|
$
|
24,037
|
|
Accrued liabilities
|
|
|
5,987
|
|
|
|
8,151
|
|
Current portion of long-term debt and obligations under capital
leases
|
|
|
315
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
$
|
28,130
|
|
|
$
|
32,358
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and obligations under capital leases
|
|
$
|
35,302
|
|
|
$
|
35,700
|
|
Other long-term obligations
|
|
|
666
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities of discontinued operations
|
|
$
|
35,968
|
|
|
$
|
36,062
|
|
|
|
|
|
|
|
|
|
|
Included in the Companys discontinued liabilities is a
Real Estate Investment Trust Loan (the REIT
Loan) aggregating $34.6 million and
$35.3 million as of September 30, 2010 and 2009,
respectively. Borrowings under this REIT Loan are 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 is
81/2%.
Upon the disposition of the Companys interest in the
related hospital, the REIT Loan was repaid in full in November
2010.
72
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Asset
Impairment Charges
|
2010
Impairment Charges
During the year ended September 30, 2010, as more fully
discussed in Note 1, the Companys Board of Directors
was in the process of conducting a review of strategic
alternatives for the Company. Additionally, management noted a
decline in operating performance at certain facilities during
2010. The Company performed impairment analyses using
undiscounted cash flows at the end of each respective reporting
period in 2010 to determine if the carrying amounts of fixed
assets were not recoverable. As a result of the decline in
operating performance as well as changes in the timing and
source of anticipated cash flows for certain facilities the
Company determined that the carrying value of these facilities
was not fully recoverable. The Company then compared the fair
value of those assets to their respective carrying values in
order to determine the amount of the impairment. As a result
approximately $66.8 million of fixed asset impairment
charges were recorded during the year ended September 30,
2010. The Companys fair value estimates were determined by
management based on discounted cash flow models, market
comparables, signed letters of intent to sell certain
facilities, and third party indications of value obtained in
conjunction with the Companys evaluation of strategic
alternatives.
The Companys fair value estimates could change by material
amounts in subsequent periods. Many factors and assumptions can
impact the estimates, including the hospitals future
financial results, the impact of future decisions relative to
the Companys Strategic Alternatives Review, and changes in
health care industry trends and regulations. The impairments do
not include the costs of closing or selling the hospitals or
other future operating costs, which could be substantial. See
Note 13 for further discussions as to the Companys
determination of fair value.
In addition, the MedCath Partners Division recorded charges to
earnings of $0.1 million and $1.8 million for the
write-down of the Companys investment in Tri-County Heart
New Jersey, LLC and Southwest Arizona Heart and Vascular Center,
LLC, respectively. The MedCath Partners Division received
indicators of value in relation to selling the Companys
interests in these businesses, evaluated the carrying values and
determined that there was a loss in value that was other than
temporary. Accordingly, the Company recorded an impairment
charge of $1.9 million against the Companys
investments, which has been included in equity in net earnings
of unconsolidated affiliates.
2009
Goodwill Impairment Charge
The first step of the Companys annual impairment test was
performed as of September 30, 2009, initially using a
combination of a discounted cash flow, market multiple, and
comparable transaction methods. However, the reconciliation of
the fair value of the Hospital Division reporting unit to the
Companys market capitalization at September 30, 2009,
resulted in a fair value that indicated an implied control
premium that did not appear reasonable. During the fourth
quarter of fiscal 2009, the Companys stock price
underperformed comparable companies as well as the broader
markets, and the Company experienced a decline in its fourth
quarter operating results. As a result of these events, the
Company placed more reliance on the discounted cash flow method
and used this method to estimate the fair value which resulted
in a fair value that was below the carrying value of the
Hospital Division reporting unit.
The second step of the Companys impairment analysis
involved allocating the fair value of the Hospital Division
reporting unit, as derived in the first step discussed above, to
the assets and liabilities of the Hospital Division reporting
unit. This process requires significant management estimates and
judgments, and is used to determine the implied fair value of
the Hospital Division reporting units goodwill. The
Company incorporated recent appraisals and other information in
its analysis, and concluded the implied fair value of goodwill
was zero. As a result the entire balance of $60.2 million
of goodwill (including $8.7 million related to businesses
classified as discontinued operations in 2010) was impaired
in the fourth quarter of fiscal 2009.
73
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Business
Combinations and Hospital Development
|
Purchase of Additional Interests in Hospitals
During September 2008, the Company purchased an additional 3.7%
ownership interest in the TexSan Heart Hospital for
$1.2 million. Additionally, during June 2008 the Company
acquired an additional 14.29% ownership interest in the
TexSan Heart Hospital, by converting $9.5 million of
intercompany debt to equity. As discussed in Note 4, the
Company wrote-off all its goodwill in the year ended
September 30, 2009.
During July 2008, the Company purchased an additional 3.0%
interest in the Heart Hospital of New Mexico for
$2.5 million. As discussed in Note 4, the Company
wrote-off all its goodwill in the year ended September 30,
2009.
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%.
Diagnostic and Therapeutic Facilities
Development During April 2008, the Company paid
$8.5 million to acquire a 27.4% interest in Southwest
Arizona Heart and Vascular LLC a joint venture with the Heart
Lung Vascular Center of Yuma. The joint venture provides cardiac
catheterization lab services to Yuma Regional Medical Center in
Arizona.
During February 2008, the Company paid $1.0 million to
acquire a 33.33% interest in a joint venture with Solaris Health
Systems LLC and individual physician members to manage two
cardiac catheterization laboratories located in New Jersey.
New Hospital Development In August 2007, the
Company announced a venture to construct a new
106 inpatient bed capacity general acute care hospital,
Hualapai Mountain Medical Center, which is located in Kingman,
Arizona. The hospital is accounted for as a consolidated
subsidiary since the Company, through its wholly-owned
subsidiary, owns 82.49% of the interest in the venture with
physician partners owning the remaining 17.51%. Further, the
Company exercises substantive control over the hospital.
Construction of Hualapai Mountain Medical Center began during
fiscal year 2007. The facility was completed and opened during
October 2009 with 70 licensed beds, and the capacity for an
additional 36 beds to facilitate future growth.
In May 2007, the Company and its physician partners announced a
119 bed general acute care expansion of its hospital located in
St. Tammany Parish, Louisiana. The expansion was completed
during May 2009, with 79 patient rooms being completed
initially and capacity for 40 patient rooms being available
for future growth. To recognize its expanded service
capabilities, the hospital, which opened in February 2003, was
renamed the Louisiana Medical Center and Heart Hospital.
74
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
119,869
|
|
|
$
|
109,901
|
|
Receivables, principally from billings to hospitals for various
cardiovascular procedures
|
|
|
1,027
|
|
|
|
1,494
|
|
Other
|
|
|
2,667
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,563
|
|
|
|
116,675
|
|
Less allowance for doubtful accounts
|
|
|
(75,023
|
)
|
|
|
(67,361
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
48,540
|
|
|
$
|
49,314
|
|
|
|
|
|
|
|
|
|
|
Activity for the allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
67,361
|
|
|
$
|
42,648
|
|
Bad debt expense
|
|
|
46,887
|
|
|
|
39,068
|
|
Write-offs, net of recoveries
|
|
|
(39,225
|
)
|
|
|
(14,355
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
75,023
|
|
|
$
|
67,361
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment
|
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
22,001
|
|
|
$
|
26,694
|
|
Buildings
|
|
|
186,806
|
|
|
|
227,914
|
|
Equipment
|
|
|
186,983
|
|
|
|
188,903
|
|
Construction in progress
|
|
|
25
|
|
|
|
17,362
|
|
|
|
|
|
|
|
|
|
|
Total, at cost
|
|
|
396,815
|
|
|
|
460,873
|
|
Less accumulated depreciation
|
|
|
(172,633
|
)
|
|
|
(158,156
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
223,182
|
|
|
$
|
302,717
|
|
|
|
|
|
|
|
|
|
|
As further discussed in Note 4, during the year ended
September 30, 2010 the Company recorded impairment charges
of $66.8 million for the write down of certain property and
equipment.
Substantially all of the Companys property and equipment
is either pledged as collateral for various long-term
obligations or assigned to lenders under the Senior Secured
Credit Facility as intercompany collateral liens, see
Note 9.
|
|
8.
|
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
75
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
September 30, 2010, all of the Companys investments
in unconsolidated affiliates are accounted for using the equity
method.
Variable
Interest Entities
Investments in unconsolidated affiliates accounted for under the
equity method (which are included in Other assets on the
consolidated balance sheets) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Avera Heart Hospital of South Dakota
|
|
$
|
8,730
|
|
|
$
|
9,143
|
|
Harlingen Medical Center
|
|
|
5,839
|
|
|
|
5,621
|
|
HMC Realty, LLC
|
|
|
(14,044
|
)
|
|
|
(11,909
|
)
|
Southwest Arizona Heart and Vascular, LLC
|
|
|
7,000
|
|
|
|
8,757
|
|
Other
|
|
|
1,465
|
|
|
|
2,443
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,990
|
|
|
$
|
14,055
|
|
|
|
|
|
|
|
|
|
|
In August 2010, the Company entered into an agreement with Avera
McKennan for the sale of its interest in Avera Heart Hospital of
South Dakota whereby Avera McKennan would purchase a MedCath
subsidiary which was the indirect owner of a one-third ownership
interest and which held management rights in Avera Heart
Hospital of South Dakota. The transaction closed on
October 1, 2010.
As further discussed in Note 22, the Company sold its
equity interest in Southwest Arizona Heart and Vascular Center,
LLC on November 1, 2010. Pursuant to such pending sale, the
Company recognized a write down of its investment of
$1.8 million to record the Companys investment in
such business at its net realizable value expected from the sale
proceeds.
The Companys ownership percentage for each investment
accounted for under the equity method is presented in the table
below:
|
|
|
|
|
Investee
|
|
Ownership
|
|
|
Avera Heart Hospital of South Dakota(a)
|
|
|
33.3
|
%
|
Harlingen Medical Center(a)
|
|
|
34.8
|
%
|
HMC Realty LLC(a)
|
|
|
36.1
|
%
|
Southwest Arizona Heart and Vascular, LLC(b)
|
|
|
27.0
|
%
|
All Other:
|
|
|
|
|
Blue Ridge Cardiology Services, LLC(b)
|
|
|
50.0
|
%
|
Austin Development Holding, Inc.(a)
|
|
|
50.0
|
%
|
Central New Jersey Heart Services, LLC(b)
|
|
|
14.8
|
%
|
Coastal Carolina Heart, LLC(b)
|
|
|
9.2
|
%
|
|
|
|
(a)
|
|
Included in the Hospital Division
|
|
(b)
|
|
Included in MedCath Partners
Division
|
Accumulated deficit includes $9.3 million,
$9.3 million, and $10.3 million of undistributed
earnings from unconsolidated affiliates accounted for under the
equity method at September 30, 2010, 2009, and 2008,
respectively. Distributions received from unconsolidated
affiliates accounted for under the equity method were
$11.4 million, $10.0 million and $7.7 million
during the years ended September 30, 2010, 2009 and 2008,
respectively.
76
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables represent summarized combined financial
information of the Companys unconsolidated affiliates
accounted for under the equity method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
219,561
|
|
|
$
|
225,843
|
|
|
$
|
215,707
|
|
Income from operations
|
|
$
|
45,142
|
|
|
$
|
47,736
|
|
|
$
|
43,053
|
|
Net income
|
|
$
|
36,065
|
|
|
$
|
38,797
|
|
|
$
|
34,004
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current assets
|
|
$
|
58,690
|
|
|
$
|
68,174
|
|
Long-term assets
|
|
$
|
144,402
|
|
|
$
|
148,993
|
|
Current liabilities
|
|
$
|
23,922
|
|
|
$
|
25,770
|
|
Long-term liabilities
|
|
$
|
121,524
|
|
|
$
|
122,629
|
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Amended Credit Facility
|
|
$
|
66,563
|
|
|
$
|
80,000
|
|
Notes payable to various lenders
|
|
|
|
|
|
|
6,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,563
|
|
|
|
86,054
|
|
Less current portion
|
|
|
(14,063
|
)
|
|
|
(19,491
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
52,500
|
|
|
$
|
66,563
|
|
|
|
|
|
|
|
|
|
|
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 provides 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 includes a $25.0 million
sub-limit
for the issuance of stand-by and commercial letters of credit
and a $10.0 million
sub-limit
for swing-line loans. At the request of the Company and approval
from its lenders, the aggregate amount available under the
Amended Credit Facility may be increased by an amount up to
$50.0 million. Borrowings under the Amended Credit
Facility, excluding swing-line loans, bear 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
September 30, 2010 the Term Loan bore interest at 3.26%.
The $66.6 million outstanding under the Amended Credit
Facility at September 30, 2010 related to the Term Loan. No
amounts were outstanding under the Revolver as of
September 30, 2010. At September 30, 2009,
$75.0 million was outstanding under the Term Loan and
$5.0 million was outstanding under the Revolver.
The Amended Credit Facility continues to be guaranteed jointly
and severally by the Company and certain of the Companys
existing and future, direct and indirect, wholly owned
subsidiaries and is secured by a first priority perfected
security interest in all of the capital stock or other ownership
interests owned by the Company and subsidiary guarantors in each
of their subsidiaries, and, subject to certain exceptions in the
Amended Credit Facility, all other present and future assets and
properties of the Company and the subsidiary guarantors and all
intercompany notes.
The Amended Credit Facility requires 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 contains 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.
77
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Amended Credit Facility contains 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 is required to make mandatory prepayments of
principal in specified amounts upon the occurrence of certain
events identified in the Amended Credit Facility and is
permitted to make voluntary prepayments of principal under the
Amended Credit Facility. The Term Loan is 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.
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 asset 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. 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 provides for a reduction in
amount of the Revolver from $85 million to
$59.5 million as of the date of the First Amendment. Under
terms of the First Amendment, the fixed charge coverage ratio is
not tested at either September 30, 2010 or
December 31, 2010, and will be retested at the fiscal
quarter ending March 31, 2011 and subsequent fiscal
quarters.
Senior Notes During December 2008, the
Company redeemed its then outstanding
97/8% senior
notes (the Senior Notes) issued by MedCath Holdings
Corp., a wholly owned subsidiary of the Company, for
$111.2 million, which included the payment of a repurchase
premium of $5.0 million and accrued interest of
$4.2 million. The Senior Notes were redeemed through
borrowings under the Credit Facility and available cash on hand.
In addition to the aforementioned repurchase premium, the
Company incurred $2.0 million in expense related to the
write-off of previously incurred financing costs associated with
the Senior Notes. The repurchase premium and write off of
previously incurred financing costs have been included in the
consolidated statements of operations as loss on early
extinguishment of debt for the year ended September 30,
2009.
Notes Payable to Various Lenders The Company
acquired various medical and other equipment for a hospital with
installment notes payable to an equipment lender collateralized
by the related equipment. Amounts borrowed under these notes are
payable in monthly installments of principal and interest over a
7 year term with fixed interest rates of 6.74% to 7.71%.
The Company had guaranteed these equipment loans. The Company
received a fee from the minority partners in the subsidiary
hospitals as consideration for providing guarantees in excess of
the Companys ownership percentage in the subsidiary
hospitals, see Note 12. These guarantees expired concurrent
with the repayment of the related equipment loans. During June
2010, the Company repaid the remaining $4.2 million note
payable obligations to certain equipment lenders on behalf of
its consolidated subsidiary, TexSan Heart Hospital. At
September 30, 2010, there are no notes payable to various
lenders outstanding.
78
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt Covenants At September 30, 2009,
the Company was in violation of financial covenants under
equipment loans at its consolidated subsidiary TexSan Heart
Hospital. Accordingly, the total outstanding balance for these
loans of $6.1 million was included in the current portion
of long-term debt and obligations under capital leases on the
Companys consolidated balance sheet. The covenant
violations did not result in any other non-compliance related to
the remaining covenants governing the Companys outstanding
debt; therefore the Company was in compliance with all other
covenants. Furthermore, these loans were paid in-full as of
September 30, 2010. As of September 30, 2010, the
Company was in compliance with all covenants governing its
outstanding debt.
Interest Rate Swaps During the year ended
September 30, 2006 one of the hospitals in which the
Company has a noncontrolling interest and consequently accounts
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.
Future Maturities Presented below are the
future maturities of long-term debt at September 30, 2010.
|
|
|
|
|
|
|
Debt
|
|
Fiscal Year
|
|
Maturity
|
|
|
2011
|
|
$
|
14,063
|
|
2012
|
|
|
52,500
|
|
|
|
|
|
|
|
|
$
|
66,563
|
|
|
|
|
|
|
|
|
10.
|
Obligations
Under Capital Leases
|
The Company currently leases several diagnostic and therapeutic
facilities, mobile catheterization laboratories, office space,
computer software and hardware, equipment and certain vehicles
under capital leases expiring through fiscal year 2015. Some of
these leases contain provisions for annual rental adjustments
based on increases in the consumer price index, renewal options,
and options to purchase during the lease terms. Amortization of
the capitalized amounts is included in depreciation expense.
Total assets under capital leases (net of accumulated
depreciation of $3.2 million and $3.0 million) at
September 30, 2010 and 2009, respectively, are
$9.2 million and $2.7 million, respectively, and are
included in property and equipment on the consolidated balance
sheets. Lease payments during the years ended September 30,
2010, 2009, and 2008 were $2.3 million, $1.1 million
and $1.1 million, respectively, and include interest of
$0.4 million, $0.2 million, and $0.1 million,
respectively.
Future minimum lease payments at September 30, 20010 are as
follows:
|
|
|
|
|
|
|
Minimum
|
|
Fiscal Year
|
|
Lease Payment
|
|
|
2011
|
|
$
|
3,106
|
|
2012
|
|
|
2,607
|
|
2013
|
|
|
2,104
|
|
2014
|
|
|
1,708
|
|
2015
|
|
|
789
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
10,314
|
|
Less amounts representing interest
|
|
|
(1,205
|
)
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
9,109
|
|
Less current portion
|
|
|
(2,609
|
)
|
|
|
|
|
|
|
|
$
|
6,500
|
|
|
|
|
|
|
79
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Liability
Insurance Coverage
|
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 September 30,
2010 and September 30, 2009, 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 $3.1 million and
$4.0 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. The total
estimated reserve for self-insured liabilities for
workmans compensation, employee health and dental claims
was $3.5 million and $3.1 million as of
September 30, 2010 and September 30, 2009,
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 program of $175,000 per plan participant.
|
|
12.
|
Commitments
and Contingencies
|
Operating Leases The Company currently leases
several cardiac diagnostic and therapeutic facilities, mobile
catheterization laboratories, office space, computer software
and hardware equipment, certain vehicles and land under
noncancelable operating leases expiring through fiscal year
2017. Total rent expense under noncancelable rental commitments
was approximately $1.5 million, $2.2 million and
$2.3 million for the years ended September 30, 2010,
2009 and 2008, respectively, and is included in other operating
expenses in the accompanying consolidated statements of income.
The approximate future minimum rental commitments under
noncancelable operating leases as of September 30, 2010 are
as follows:
|
|
|
|
|
|
|
Rental
|
|
Fiscal Year
|
|
Commitment
|
|
|
2011
|
|
$
|
1,724
|
|
2012
|
|
|
1,601
|
|
2013
|
|
|
1,562
|
|
2014
|
|
|
1,300
|
|
2015
|
|
|
397
|
|
Thereafter
|
|
|
99
|
|
|
|
|
|
|
|
|
$
|
6,683
|
|
|
|
|
|
|
Put and Call Options During August 2010, the
Company amended its partnership agreement with one of its
hospitals, whereby call and put options were added relative to
the Companys noncontrolling interest in the hospital. The
call option will allow 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 option allows 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 at any time before
August 31, 2011. The noncontrolling shareholders
recorded basis in their partnership interest was zero prior to
the amendment of this agreement.
80
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accordingly, the Company has recognized a redeemable
noncontrolling interest of $2.9 million (net of taxes of
$1.6 million) as of September 30, 2010 and included
the corresponding expense as a loss allocable to noncontrolling
interests.
During September 2010, the Company entered into a call agreement
with 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 September 30, 2010).
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.
In 2005, CMS began using 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 expand 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 September 30, 2010.
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
consolidated subsidiary 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 began negotiating
settlement agreements during the second quarter of fiscal 2009
with the DOJ whereby the Company was expected to pay
$0.8 million to settle and obtain releases from any federal
civil false claims liability related to the DOJs
investigation. The DOJ allegations do not involve patient care,
and relate solely to whether the procedures were properly
reimbursable by Medicare. The settlement does not include any
finding of wrong-doing or any admission of liability. During
fiscal 2010, the Company paid $0.8 million initially
accrued within other accrued liabilities on
81
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the consolidated balance sheet as of September 30, 2009. As
of September 30, 2010, both settlement agreements have been
executed.
In March 2010, the DOJ issued a civil investigative demand
(CID) pursuant to the federal False Claims Act to
one of the Companys hospitals. The CID requested
information regarding Medicare claims submitted by the 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.
In September 2010, the Company received a letter from the DOJ
advising it that an investigation is being conducted to
determine whether certain of their 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 indicates 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. The Company
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 and has entered into a tolling agreement with the
government in this investigation; to date, the DOJ has not
asserted any claim against the Companys other hospitals.
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.
On January 8, 2009, the California Supreme Court ruled in
Prospect Medical Group, Inc., et al. v. Northridget
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.
In addition to reserves for medical malpractice, the Company
also maintains reserves for self-insured workmans
compensation, healthcare and dental coverage. The total
estimated reserve for self-insured liabilities for
workmans compensation, employee health and dental claims
was $3.5 million and $3.1 million as of
September 30, 2010 and September 30, 2009,
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 program of $175,000 per plan participant.
The Company has evaluated the provisions of the Health Care
Reform Laws. The Company is unable to predict at this time the
full impact of the Health Care Reform Laws on the Company and
its consolidated financial statements.
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 September 30, 2010, the maximum potential
future payments that the Company could be required to make under
these guarantees was approximately $28.2 million
($0.7 million related
82
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to discontinued operations) through June 2013. At
September 30, 2010 the Company had total liabilities of
$13.0 million ($0.7 million related to discontinued
operations) for the fair value of these guarantees, of which
$7.9 million is in other accrued liabilities and
$0.3 million is in current liabilities of discontinued
operations, and $4.4 million is in other long term
obligations and $0.4 million is in long-term liabilities of
discontinued operations. Additionally, the Company had assets of
$13.3 million ($0.7 million related to discontinued
operations) representing the future services to be provided by
the physicians, of which $7.8 million is in prepaid
expenses and other current assets and $0.3 million in
current assets of discontinued operations, and $4.8 million
is in other assets and $0.4 million in non-current assets
of discontinued operations.
|
|
13.
|
Fair
Value Measurements
|
As described in Note 2 Recently Adopted Accounting
Pronouncements, the Company adopted the accounting standard
issued by the FASB that defines fair value, establishes a
framework for measuring fair value and enhances disclosures
about fair value measures required under other accounting
pronouncements. The Company is required to provide additional
disclosures about fair value measurements for each major
category of assets and liabilities measured at fair value on a
non-recurring basis. Our 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 were 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
Other
|
|
|
Significant
|
|
|
Year Ended
|
|
|
|
Market
|
|
|
Observable
|
|
|
Unobservable
|
|
|
9/30/10
|
|
|
|
Price
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Impairments
|
|
|
Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division certain long-lived assets
|
|
$
|
|
|
|
$
|
33,545
|
|
|
$
|
33,122
|
|
|
$
|
63,678
|
|
Partners Division certain long-lived assets
|
|
|
|
|
|
|
|
|
|
|
7,935
|
|
|
|
800
|
|
Partners Division Investments in Affiliates
|
|
|
|
|
|
|
7,400
|
|
|
|
|
|
|
|
1,915
|
|
Corporate and other certain long-lived assets
|
|
|
|
|
|
|
|
|
|
|
4,880
|
|
|
|
2,344
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division certain long-lived assets
|
|
$
|
|
|
|
$
|
32,000
|
|
|
$
|
|
|
|
$
|
5,249
|
|
Partners Division certain long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other certain long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described in Note 4, we recorded $63.7 million,
$0.8 million and $2.3 million impairment charges in
continuing operations in the fiscal year ended
September 30, 2010 for the write-down of buildings, land,
equipment and other long-lived assets in the Hospital Division,
Partners Division and Corporate and other, respectively. The
Hospital Division charge relates to one of our hospitals due to
a decline in the fair value of real estate in the market in
which the hospitals operate and a decline in the estimated fair
value of equipment based on discounted cash flows. In addition,
the Hospital Division charge relates to one of our hospitals
that received a letter of intent from a third party buyer. As
described in Note 8, we recorded a $1.9 million
write-down of investments in affiliates related to
83
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
two of the Partners Division affiliates in which the Company has
entered into agreements or disposed of its interest in such
affiliates. As described in Note 3, we recorded a
$5.2 million impairment charge in discontinued operations
related to a hospital in which the Company entered into an
agreement to dispose of its interest.
Based on Level 3 inputs, the estimated 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 a carrying value of $101.2 million
($34.6 million related to discontinued operations). Based
on Level 3 inputs, at September 30, 2009, the
estimated fair value of long-term debt, including the current
portion, was $127.6 million ($41.4 million related to
discontinued operations) as compared to a carrying value of
$121.4 million ($35.3 million related to discontinued
operations). Fair value of the Companys fixed rate debt
was estimated using discounted cash flow analyses, based on the
Companys current incremental borrowing rates for similar
types of arrangements and market information. 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 or Level 2 inputs.
84
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(7,255
|
)
|
|
$
|
1,864
|
|
|
$
|
3,931
|
|
State
|
|
|
747
|
|
|
|
899
|
|
|
|
2,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense (benefit)
|
|
|
(6,508
|
)
|
|
|
2,763
|
|
|
|
6,689
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(19,179
|
)
|
|
|
(3,302
|
)
|
|
|
2,365
|
|
State
|
|
|
(975
|
)
|
|
|
177
|
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense (benefit)
|
|
$
|
(20,154
|
)
|
|
$
|
(3,125
|
)
|
|
$
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(26,662
|
)
|
|
$
|
(362
|
)
|
|
$
|
8,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
6,794
|
|
|
$
|
24,481
|
|
Equity investments
|
|
|
2,151
|
|
|
|
2,151
|
|
Accrued liabilities
|
|
|
1,060
|
|
|
|
|
|
Gain on sale of partnership units
|
|
|
2,461
|
|
|
|
2,461
|
|
Other
|
|
|
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
12,466
|
|
|
|
29,661
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating and economic loss carryforward
|
|
$
|
5,118
|
|
|
$
|
4,447
|
|
Basis difference in investment in subsidiaries
|
|
|
15,768
|
|
|
|
5,642
|
|
Allowances for doubtful accounts and other reserves
|
|
|
7,396
|
|
|
|
8,859
|
|
Accrued liabilities
|
|
|
3,830
|
|
|
|
3,736
|
|
Intangibles
|
|
|
2,185
|
|
|
|
2,293
|
|
Share based compensation expense
|
|
|
4,623
|
|
|
|
4,531
|
|
Management contracts
|
|
|
330
|
|
|
|
586
|
|
Other
|
|
|
216
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
39,466
|
|
|
|
30,639
|
|
Valuation allowance
|
|
|
(4,610
|
)
|
|
|
(2,691
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
22,390
|
|
|
$
|
(1,713
|
)
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and 2009, the Company had recorded
a valuation allowance of $4.6 million and
$2.7 million, respectively, primarily related to state net
operating loss carryforwards. The valuation allowance increased
by approximately $1.9 million during the year ended
September 30, 2010 due to a current year loss incurred in
certain states.
85
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has state net operating loss carryforwards of
approximately $116.3 million that began to expire in 2009.
The differences between the U.S. federal statutory tax rate
and the effective rate are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory federal income tax rate
|
|
|
(35.0
|
)%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
State income taxes, net of federal effect
|
|
|
(2.9
|
)%
|
|
|
0.8
|
%
|
|
|
4.6
|
%
|
State valuation allowances on NOLs
|
|
|
2.8
|
%
|
|
|
1.3
|
%
|
|
|
(2.0
|
)%
|
Noncontrolling interest
|
|
|
(4.1
|
)%
|
|
|
(7.7
|
)%
|
|
|
(14.4
|
)%
|
Share-based compensation expense
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
1.2
|
%
|
Penalties
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
Goodwill
|
|
|
0.0
|
%
|
|
|
39.9
|
%
|
|
|
0.0
|
%
|
Other non-deductible expenses and adjustment
|
|
|
(0.2
|
)%
|
|
|
(0.2
|
)%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
(39.4
|
)%
|
|
|
(0.8
|
)%
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, the FASB issued a new accounting standard that
established a single model to address the accounting for
uncertain tax positions. The new accounting standard clarified
the accounting for income taxes by prescribing a minimum
recognition threshold a tax position is required to meet before
being recognized in the financial statements. The new accounting
standard also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The Company adopted the new accounting standard effective
October 1, 2007. As a result of the implementation, the
Company recognized a $0.3 million net increase to the
reserves for uncertain tax positions. This increase was
accounted for as a cumulative effect adjustment and recognized
as a reduction in beginning retained earnings in the
consolidated balance sheet. Including the cumulative effect
adjustment, the Company had approximately $2.4 million of
unrecognized tax benefits as of October 1, 2007 and
$0.5 million as of September 30, 2009 recorded in
other accrued liabilities on the consolidated balance sheets.
There is no unrecognized tax benefit as of September 30,
2010. Of the balance at September 30, 2009
$0.3 million represented the amount of unrecognized tax
benefits that, if recognized, would favorably impact the
effective income tax rate in any future periods. It is not
expected that the amount of unrecognized tax benefits will
change in the next twelve months.
The Company includes interest related to tax issues as part of
interest expense in the consolidated financial statements. The
Company records applicable penalties, if any, related to tax
issues within the income tax provision. The Company did not have
an accrual for interest as of September 30, 2010 and had
$0.2 million accrued for interest as of September 30,
2009. The interest impact for the unrecognized tax liabilities
was $(0.2) million to the consolidated financial results
for fiscal 2010. There were no penalties recorded for the
unrecognized tax benefits.
Following is a reconciliation of the Companys unrecognized
tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Beginning Balance
|
|
$
|
519
|
|
|
$
|
1,234
|
|
|
$
|
2,424
|
|
Additions based on tax positions of prior years
|
|
|
|
|
|
|
|
|
|
|
640
|
|
Settlements
|
|
|
|
|
|
|
(514
|
)
|
|
|
|
|
Reductions for positions of prior years
|
|
|
(519
|
)
|
|
|
(201
|
)
|
|
|
(1,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
|
|
|
$
|
519
|
|
|
$
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the normal three year federal statute of limitations, the
Company may be subject to examination by the Internal Revenue
Service (IRS) back to September 30, 2007. In
addition, the Company files income tax returns in multiple
states and local jurisdictions. Generally, the Company is
subject to state and local audits going back to years ended
September 30, 2007; however, due to existing net operating
loss carryforwards, the state can audit back to
September 30, 1998 and September 30, 1999 in a few
significant states.
In the ordinary course of the Companys business there are
transactions where the ultimate tax determination is uncertain.
The Company believes that is has adequately provided for income
tax issues not yet resolved with federal, state and local tax
authorities. If an ultimate tax assessment exceeds the
Companys estimate of tax liabilities, an additional charge
to expense would result.
Basic The calculation of basic earnings per
share includes 150,900 and 101,500 of restricted stock units
that have vested but as of September 30, 2010 and 2009,
respectively, have not been converted into common stock. No
restricted stock units vested as of September 30, 2008. See
Note 16 as it relates to restricted stock units granted to
directors of the Company.
Diluted The calculation of diluted earnings
per share considers the potential dilutive effect of options to
purchase 932,137, 1,027,387, and 1,776,837 shares of common
stock at prices ranging from $9.95 to $33.05, which were
outstanding at September 30, 2010, 2009 and 2008,
respectively, as well as 694,322, 552,827 and
123,982 shares of restricted stock which were outstanding
at September 30, 2010, 2009 and 2008, respectively. Of the
outstanding stock options and restricted stock, 1,580,214, and
947,000 have not been included in the calculation of diluted
earnings (loss) per share at September 30, 2009 and 2008,
respectively, because the options and restricted stock were
anti-dilutive. No options or restricted stock were included in
the calculation of diluted earnings per share at
September 30, 2010, as the consideration of such shares
would be anti-dilutive due to the loss from continuing
operations, net of tax.
|
|
16.
|
Stock
Compensation Plans
|
On July 28, 1998, the Companys board of directors
adopted a stock option plan (the 1998 Stock Option
Plan) under which it may grant incentive stock options and
nonqualified stock options to officers and other key employees.
Under the 1998 Stock Option Plan, the board of directors may
grant option awards and determine the option exercise period,
the option exercise price, and other such conditions and
restrictions on the grant or exercise of the option as it deems
appropriate. The 1998 Stock Option Plan provides that the option
exercise price may not be less than the fair value of the common
stock as of the date of grant and that the options may not be
exercised more than ten years after the date of grant. Options
granted during the year ended September 30, 2008 were
granted at an option exercise price equal to or greater than
fair market value of the underlying stock at the date of the
grant and become exercisable on grading and fixed vesting
schedules ranging from 4 to 8 years subject to certain
performance acceleration features. Effective September 30,
2005, the compensation committee of the board of directors
approved a plan to accelerate the vesting of substantially all
unvested stock options previously awarded to employees, subject
to a Restriction Agreement. No options may be granted under the
1998 Stock Option Plan after July 31, 2008. At
September 30, 2010, 420,137 options were outstanding under
the 1998 Option Plan.
On July 23, 2000, the Company adopted an outside
directors stock option plan (the Directors
Plan) under which nonqualified stock options may be
granted to non-employee directors. Under the Directors
Plan, grants of 2,000 options were granted to each new director
upon becoming a member of the board of directors and grants of
2,000 options were made to each continuing director on
October 1, 1999 (the first day of the fiscal year ended
September 30, 2000). Effective September 15, 2000, the
Directors Plan was amended to increase the number of
options granted for future awards from 2,000 to 3,500. Further,
effective September 30, 2007, the Directors Plan was
amended to increase the number of options granted for future
awards from 3,500 to 8,000. All options granted under the
Directors Plan through September 30, 2010 have been
granted at an exercise price equal to or greater than
87
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the fair market value of the underlying stock at the date of the
grant. Options are exercisable immediately upon the date of
grant and expire ten years from the date of grant. Effective
March 5, 2008, the Directors Plan was amended to
increase the maximum number of common stock shares which can be
issued under the Directors Plan to 550,000, of which
192,900 were outstanding as of September 30, 2010.
Effective October 1, 2005, the Company adopted the MedCath
Corporation 2006 Stock Option and Award Plan (the Stock
Plan), which provides for the issuance of stock options,
restricted stock and restricted stock units to employees of the
Company. The Stock Plan is administered by the compensation
committee of the board of directors, who has the authority to
select the employees eligible to receive awards. This committee
also has the authority under the Stock Plan to determine the
types of awards, select the terms and conditions attached to all
awards, and, subject to the limitation on individual awards in
the Stock Plan, determine the number of shares to be awarded. At
September 30, 2010, the maximum number of shares of common
stock which can be issued through awards granted under the Stock
Plan was 1,750,000 of which 1,203,385 were outstanding as of
September 30, 2010.
Stock options granted to employees under the Stock Plan have an
exercise price per share that represents the fair market value
of the common stock of the Company on the respective dates that
the options are granted. The options expire ten years from the
grant date, are fully vested as of the date of grant, and are
exercisable at any time. Subsequent to the exercise of stock
options, the shares of stock acquired upon exercise may be
subject to certain sale restrictions depending on the
optionees employment status and length of time the options
were held prior to exercise.
The Company recognized share-based compensation expense for the
fiscal years ended September 30, 2010, 2009 and 2008 of
$3.1 million, $2.4 million and $5.0 million,
respectively. The associated tax benefits related to the
compensation expense recognized for fiscal 2010, 2009 and 2008
was $1.3 million, $1.0 million and $2.0 million,
respectively. No options were granted during the fiscal year
ended September 30, 2010. The weighted-average grant-date
fair value of options granted during the fiscal years ended
September 30, 2009 and 2008 was $9.75 and $10.53,
respectively. No options were exercised during fiscal 2010. The
total intrinsic value of options exercised during fiscal 2008
was $1.4 million. The total intrinsic value of options
exercised during fiscal 2009 was immaterial. There was no
intrinsic value of options outstanding at September 30,
2010.
Stock
Options
Stock option activity for the Companys stock compensation
plans during the years ended September 30, 2010, 2009 and
2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding options, September 30, 2007
|
|
|
1,727,112
|
|
|
$
|
19.11
|
|
Granted
|
|
|
480,000
|
|
|
|
24.51
|
|
Exercised
|
|
|
(269,996
|
)
|
|
|
15.99
|
|
Cancelled
|
|
|
(160,279
|
)
|
|
|
26.93
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2008
|
|
|
1,776,837
|
|
|
$
|
22.15
|
|
Granted
|
|
|
82,000
|
|
|
|
17.46
|
|
Exercised
|
|
|
(7,000
|
)
|
|
|
10.95
|
|
Cancelled
|
|
|
(824,450
|
)
|
|
|
21.65
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2009
|
|
|
1,027,387
|
|
|
$
|
22.25
|
|
Cancelled
|
|
|
(95,250
|
)
|
|
|
25.86
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2010
|
|
|
932,137
|
|
|
$
|
21.89
|
|
|
|
|
|
|
|
|
|
|
88
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information for options
outstanding and exercisable at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
Range of
|
|
and
|
|
|
Remaining
|
|
|
Exercise
|
|
Prices
|
|
Exercisable
|
|
|
Life (years)
|
|
|
Price
|
|
|
$ 9.95 - 15.80
|
|
|
108,137
|
|
|
|
4.24
|
|
|
$
|
13.69
|
|
16.10 - 18.26
|
|
|
20,500
|
|
|
|
4.05
|
|
|
|
17.15
|
|
19.00 - 21.01
|
|
|
59,500
|
|
|
|
3.20
|
|
|
|
19.48
|
|
21.49 - 21.49
|
|
|
500,000
|
|
|
|
5.39
|
|
|
|
21.49
|
|
21.66 - 23.65
|
|
|
30,500
|
|
|
|
5.04
|
|
|
|
22.35
|
|
23.79 - 27.71
|
|
|
142,000
|
|
|
|
6.60
|
|
|
|
26.56
|
|
27.80 - 29.68
|
|
|
36,500
|
|
|
|
6.30
|
|
|
|
29.06
|
|
30.35 - 33.05
|
|
|
35,000
|
|
|
|
6.64
|
|
|
|
32.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 9.95 - 33.05
|
|
|
932,137
|
|
|
|
5.34
|
|
|
$
|
21.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
During the year ended September 30, 2006, the Company
granted to employees 270,836 shares of restricted stock
units, which vested at various dates through March 2009. The
compensation expense, which represents the fair value of the
stock measured at the market price at the date of grant, less
estimated forfeitures, was recognized on a straight-line basis
over the vesting period.
During fiscal 2010 and 2009, the Company granted to employees
401,399 and 599,645 shares of restricted stock,
respectively. There were no grants to employees during fiscal
2008. 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 fiscal 2010 and 2009, the
Company granted 89,600 and 101,500 shares of restricted
stock units to directors. There were no grants to directors
during fiscal 2008. 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 September 30, 2010 the Company had
$3.0 million of unrecognized compensation expense
associated with restricted stock awards.
89
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity for the Companys restricted stock issued under
the Stock Plan during the years ended September 30, 2010,
2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Restricted
|
|
|
Weighted-
|
|
|
|
Stock Awards
|
|
|
Average
|
|
|
|
and Units
|
|
|
Grant Price
|
|
|
Outstanding restricted stock awards and units,
September 30, 2007
|
|
|
193,982
|
|
|
$
|
19.72
|
|
Vested
|
|
|
(21,448
|
)
|
|
|
20.50
|
|
Cancelled
|
|
|
(48,552
|
)
|
|
|
20.50
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units,
September 30, 2008
|
|
|
123,982
|
|
|
$
|
19.28
|
|
Granted
|
|
|
701,145
|
|
|
|
9.00
|
|
Vested
|
|
|
(52,106
|
)
|
|
|
20.50
|
|
Cancelled
|
|
|
(118,694
|
)
|
|
|
11.19
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units,
September 30, 2009
|
|
|
654,327
|
|
|
$
|
9.64
|
|
Granted
|
|
|
490,999
|
|
|
|
7.24
|
|
Vested
|
|
|
(181,214
|
)
|
|
|
8.48
|
|
Cancelled
|
|
|
(79,827
|
)
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units,
September 30, 2010
|
|
|
884,285
|
|
|
$
|
8.67
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Employee
Benefit Plan
|
The Company has a defined contribution retirement savings plan
(the 401(k) Plan) which covers all employees. The
401(k) Plan allows employees to contribute from 1% to 50% of
their annual compensation on a pre-tax basis. The Company, at
its discretion, may make an annual contribution of up to 40% of
an employees pretax contribution, up to a maximum of 6% of
compensation. The Companys contributions to the 401(k)
Plan for the years ended September 30, 2010, 2009 and 2008
were approximately $1.9 million, $1.8 million and
$1.7 million, respectively.
|
|
18.
|
Related
Party Transactions
|
As compensation for the Companys guarantee of certain
unconsolidated affiliate hospitals long term debt, the Company
receives a debt guarantee fee; see Note 9 for further
discussion. Debt guarantee fees recorded in net revenues in the
consolidated statement of operations were $0.4 million for
the years ended September 30, 2010, 2009 and 2008.
Additionally the Company receives a management fee from
unconsolidated affiliates. Management fees recorded within net
revenues in the consolidated statement of operations were
$4.4 million, $5.0 million, and $5.4 million for
the years ended September 30, 2010, 2009 and 2008,
respectively. At September 30, 2010 and 2009 the Company
had $1.3 million and $1.6 million of outstanding fees
recorded of which $0.4 million and $1.0 million was
recorded within accounts receivable, net and $0.9 million
and $0.5 million within prepaid expenses and other current
assets, respectively, in the consolidated balance sheets
primarily related to management, insurance and legal fees
charged to unconsolidated affiliates, see Note 8 for
further discussion regarding unconsolidated affiliates of the
Company.
90
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Summary
of Quarterly Financial Data (Unaudited)
|
Summarized quarterly financial results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2010
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter (*)
|
|
|
Quarter (*)
|
|
|
Quarter (*)
|
|
|
Net revenue
|
|
$
|
106,000
|
|
|
$
|
114,007
|
|
|
$
|
111,963
|
|
|
$
|
110,527
|
|
Operating expenses
|
|
|
109,388
|
|
|
|
127,373
|
|
|
|
134,630
|
|
|
|
140,074
|
|
Loss from operations
|
|
|
(3,388
|
)
|
|
|
(13,366
|
)
|
|
|
(22,667
|
)
|
|
|
(29,547
|
)
|
Loss from continuing operations, net of taxes
|
|
|
(2,523
|
)
|
|
|
(9,351
|
)
|
|
|
(14,360
|
)
|
|
|
(25,722
|
)
|
(Loss) income from discontinued operations, net of taxes
|
|
|
(133
|
)
|
|
|
(1,858
|
)
|
|
|
1,544
|
|
|
|
4,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,656
|
)
|
|
$
|
(11,209
|
)
|
|
$
|
(12,816
|
)
|
|
$
|
(21,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(1.29
|
)
|
Discontinued operations
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
0.08
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.72
|
)
|
|
$
|
(1.29
|
)
|
Discontinued operations
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
0.08
|
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(1.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,743
|
|
|
|
19,829
|
|
|
|
19,897
|
|
|
|
19,898
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,743
|
|
|
|
19,829
|
|
|
|
19,897
|
|
|
|
19,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
The second, third and fourth quarters of fiscal 2010 includes
$14.7 million; $22.8 million; and $29.3 million,
respectively, impairment of property and equipment as discussed
in Note 4. |
As a result of the classification of certain businesses as
discontinued operations as discussed in Note 3, the Company
has recast the presentation of the results of such businesses
for all periods as compared to the presentation in the
respective quarterly report as filed on
Form 10-Q.
In fiscal year 2010, this resulted in (i) a reduction in
revenues of $41,260 in the first quarter, $20,902 in the second
quarter and $19,884 in the third quarter; (ii) a reduction
in operating expenses of $40,715 in the first quarter, $25,168
in the second quarter and $19,676 in the third quarter;
(iii) an increase in loss from operations of $545 in the
first quarter, a decrease of $4,266 in the second quarter and an
increase of $208 in the third quarter; (iv) an increase in
loss from continuing operations, net of taxes of $12 in the
first quarter, a decrease of $2,648 in the second quarter and an
increase of $205 in the third quarter; and (v) a decrease
in loss from discontinued operations, net of taxes of $12 in the
first quarter, an increase in loss of $2,648 in the second
quarter and an increase in income of $205 in the third quarter.
91
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter (*)
|
|
|
Net revenue
|
|
$
|
105,717
|
|
|
$
|
107,156
|
|
|
$
|
103,260
|
|
|
$
|
103,600
|
|
Operating expenses
|
|
|
100,566
|
|
|
|
100,311
|
|
|
|
102,109
|
|
|
|
158,216
|
|
Income (loss) from operations
|
|
|
5,151
|
|
|
|
6,845
|
|
|
|
1,151
|
|
|
|
(54,616
|
)
|
(Loss) income from continuing operations, net of taxes
|
|
|
(2,538
|
)
|
|
|
3,597
|
|
|
|
500
|
|
|
|
(53,214
|
)
|
Income (loss) from discontinued operations, net of taxes
|
|
|
4,784
|
|
|
|
1,985
|
|
|
|
(4
|
)
|
|
|
(5,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,246
|
|
|
$
|
5,582
|
|
|
$
|
496
|
|
|
$
|
(58,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
0.18
|
|
|
$
|
0.03
|
|
|
$
|
(2.70
|
)
|
Discontinued operations
|
|
|
0.24
|
|
|
|
0.10
|
|
|
|
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
$
|
0.11
|
|
|
$
|
0.28
|
|
|
$
|
0.03
|
|
|
$
|
(2.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.13
|
)
|
|
$
|
0.18
|
|
|
$
|
0.03
|
|
|
$
|
(2.70
|
)
|
Discontinued operations
|
|
|
0.24
|
|
|
|
0.10
|
|
|
|
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
$
|
0.11
|
|
|
$
|
0.28
|
|
|
$
|
0.03
|
|
|
$
|
(2.97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,599
|
|
|
|
19,664
|
|
|
|
19,733
|
|
|
|
19,740
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,599
|
|
|
|
19,690
|
|
|
|
19,733
|
|
|
|
19,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
The fourth quarter of fiscal 2009 includes $51.5 million
impairment of goodwill as discussed in Note 4. |
As a result of the classification of certain businesses as
discontinued operations as discussed in Note 3, the Company
has recast the presentation of the results of such businesses
for all periods as compared to the presentation in the
respective quarterly report as filed on
Form 10-Q
for fiscal 2010. In fiscal year 2009, this resulted in
(i) a reduction in revenues of $44,528 in the first
quarter, $23,611 in the second quarter, $21,328 in the third
quarter and $44,366 in the fourth quarter; (ii) a reduction
in operating expenses of $42,687 in the first quarter, $22,324
in the second quarter, $22,334 in the third quarter and $52,544
in the fourth quarter; (iii) a decrease in income from
operations of $1,841 in the first quarter, a decrease of $1,287
in the second quarter, an increase of $1,006 in the third
quarter and a increase of $8,178 in the fourth quarter;
(iv) an increase in loss from continuing operations, net of
taxes of $623 in the first quarter, a decrease in income of $623
in the second quarter, an increase in income of $477 in the
third quarter and a decrease in loss of $8,686 in the fourth
quarter; and (v) an increase in income from discontinued
operations, net of taxes of $623 in the first quarter, an
increase in income of $623 in the second quarter and a decrease
in income of $477 in the third quarter and a decrease in income
of $8,686 in the fourth quarter.
|
|
20.
|
Reportable
Segment Information
|
The Companys reportable segments consist of the Hospital
Division and the MedCath Partners Division. The Hospital
Division consists of freestanding, licensed general acute care
hospitals that provide a wide range of health services with a
focus on cardiovascular care. MedCath Partners Division consists
of cardiac diagnostic and therapeutic facilities that are either
freestanding or located within unrelated hospitals. MedCath
Partners Division provides management services to facilities or
operates facilities directly on a contracted basis.
92
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There is no aggregation of operating segments within each
reportable segment. The Company believes these reportable
business segments properly align the various operations of the
Company with how the chief operating decision maker views the
business. The Companys chief operating decision maker
regularly reviews financial information about each of these
reportable business segments in deciding how to allocate
resources and evaluate performance.
Financial information concerning the Companys operations
by each of the reportable segments as of and for the years ended
September 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
430,625
|
|
|
$
|
402,671
|
|
|
$
|
395,626
|
|
MedCath Partners Division
|
|
|
11,440
|
|
|
|
16,645
|
|
|
|
18,070
|
|
Corporate and other
|
|
|
431
|
|
|
|
417
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
442,496
|
|
|
$
|
419,733
|
|
|
$
|
414,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations(*):
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
(53,470
|
)
|
|
$
|
(39,891
|
)
|
|
$
|
64,387
|
|
MedCath Partners Division
|
|
|
(1,536
|
)
|
|
|
7,203
|
|
|
|
(361
|
)
|
Corporate and other
|
|
|
(13,962
|
)
|
|
|
(8,782
|
)
|
|
|
(30,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
(68,968
|
)
|
|
$
|
(41,470
|
)
|
|
$
|
33,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
23,084
|
|
|
$
|
18,350
|
|
|
$
|
16,939
|
|
MedCath Partners Division
|
|
|
3,186
|
|
|
|
4,708
|
|
|
|
4,066
|
|
Corporate and other
|
|
|
657
|
|
|
|
651
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
26,927
|
|
|
$
|
23,709
|
|
|
$
|
21,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income) including intercompany, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
15,964
|
|
|
$
|
14,132
|
|
|
$
|
16,927
|
|
MedCath Partners Division
|
|
|
14
|
|
|
|
(5
|
)
|
|
|
|
|
Corporate and other
|
|
|
(11,586
|
)
|
|
|
(10,599
|
)
|
|
|
(7,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
4,392
|
|
|
$
|
3,528
|
|
|
$
|
9,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
5,143
|
|
|
$
|
5,045
|
|
|
$
|
5,502
|
|
MedCath Partners Division
|
|
|
1,969
|
|
|
|
3,785
|
|
|
|
2,157
|
|
Corporate and other
|
|
|
155
|
|
|
|
227
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
7,267
|
|
|
$
|
9,057
|
|
|
$
|
7,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
15,371
|
|
|
$
|
82,995
|
|
|
$
|
70,079
|
|
MedCath Partners Division
|
|
|
209
|
|
|
|
|
|
|
|
1,890
|
|
Corporate and other
|
|
|
788
|
|
|
|
4,755
|
|
|
|
3,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
16,368
|
|
|
$
|
87,750
|
|
|
$
|
75,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Included in (loss) income from operations for fiscal 2010 are
impairment charges of $63.6 million, $0.9 million and
$2.3 million in the Hospital Division, MedCath Partners
Division and Corporate and other, respectively. Included in
(loss) income from operations for fiscal 2009 is an impairment
charge of $51.5 million in the Hospital Division as
discussed in Note 4. |
93
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Aggregate identifiable assets:
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
414,656
|
|
|
$
|
517,849
|
|
MedCath Partners Division
|
|
|
20,210
|
|
|
|
27,205
|
|
Corporate and other
|
|
|
59,672
|
|
|
|
45,394
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
494,538
|
|
|
$
|
590,448
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates:
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
508
|
|
|
$
|
2,834
|
|
MedCath Partners Division
|
|
|
8,382
|
|
|
|
11,075
|
|
Corporate and other
|
|
|
100
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
8,990
|
|
|
$
|
14,055
|
|
|
|
|
|
|
|
|
|
|
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 includes 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.
The Hospital Division assets include $115.2 million and
$126.4 million of assets related to discontinued operations
as of September 30, 2010 and 2009, respectively. The
MedCath Partners Division assets included $1.5 million and
$20.8 million of assets related to discontinued operations
as of September 30, 2010 and 2009, respectively.
During fiscal 2007, the board of directors approved a stock
repurchase program of up to $59.0 million. During fiscal
2008 1,885,461 million shares of common stock, with a total
cost of $44.4 million, were repurchased by the Company
under this program. There were no repurchases of common stock
during fiscal 2010 and 2009.
|
|
22.
|
Supplemental
Cash Flow Disclosures
|
Supplemental disclosures of cash flow information for the years
ended September 30, 2010, 2009 and 2008 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,526
|
|
|
$
|
7,499
|
|
|
$
|
11,682
|
|
Income taxes paid
|
|
$
|
634
|
|
|
$
|
6,212
|
|
|
$
|
26,777
|
|
Supplemental schedule of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures financed by capital leases
|
|
$
|
5,318
|
|
|
$
|
4,186
|
|
|
$
|
1,324
|
|
Accrued capital expenditures
|
|
$
|
3,847
|
|
|
$
|
7,826
|
|
|
$
|
15,229
|
|
Subsidiary stock issued in exchange for services at fair market
value
|
|
$
|
185
|
|
|
$
|
|
|
|
$
|
|
|
94
MEDCATH
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As further discussed in Note 4, the Company disposed of
i) its interest in AzHH on October 1, 2010;
ii) its interest in a subsidiary that provides consulting
services in October 2010; and iii) its interest in HHA on
November 1, 2010. Such entities met the requirements under
GAAP to be presented as discontinued operations as of
September 30, 2010.
In connection with the sale of HHA, $34.8 million of third
party long-term debt was repaid with the proceeds along with an
$11.1 million prepayment penalty.
In addition to the above dispositions, the Company sold its
minority equity interest in Southwest Arizona Heart and Vascular
Center, LLC for $7.0 million on November 1, 2010 and
its minority equity interest in Avera Heart Hospital of South
Dakota on October 1, 2010 for $20.0 million.
The Company entered into a definitive agreement in November 2010
to dispose of its interest in TexSan Heart Hospital. This
transaction is expected to close in the second fiscal quarter of
2011, which ends March 31, subject to regulatory approval
and customary closing conditions. The entity did not meet the
requirements under GAAP to be presented as a discontinued
operation as of September 30, 2010, therefore, its
operations are included in the current operations of the Company
in this annual report. However, commencing with the first
quarter of 2011, TexSan Heart Hospital will be classified
as a discontinued operation in the Companys filings.
The Company has entered into transition services agreements with
the buyers of its sold assets that extend into fiscal 2011.
Additionally, subsequent to September 30, 2010, 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.
During December 2010, the Company exercised its call right with
one of its hospitals under a Put/Call Agreement. The Put/Call
Agreement permits the Company to call the minority equity equal
to the net amount of the minority equity holders unreturned
capital contributions adjusted upward for any proportionate
share of additional proceeds upon a disposition of the hospital.
The call right is in effect for up to one year upon notice of
the Companys intent to exercise its call right.
95
INDEPENDENT
AUDITORS REPORT
To Heart Hospital of South Dakota, LLC:
We have audited the accompanying balance sheets of Heart
Hospital of South Dakota, LLC (the Company) as of
September 30, 2010, 2009 and 2008, and the related
statements of income, members capital, and cash flows for
each of the three years in the period ended September 30,
2010. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company at
September 30, 2010 and 2009, and the results of its
operations and its cash flows for each of the three years ended
September 30, 2010, in conformity with accounting
principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
December 14, 2010
96
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,890
|
|
|
$
|
14,202
|
|
Accounts receivable, net
|
|
|
5,482
|
|
|
|
5,918
|
|
Medical supplies
|
|
|
1,124
|
|
|
|
1,211
|
|
Prepaid expenses and other current assets
|
|
|
1,060
|
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,556
|
|
|
|
22,760
|
|
Property and equipment, net
|
|
|
34,584
|
|
|
|
33,769
|
|
Other assets
|
|
|
466
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,606
|
|
|
$
|
57,430
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,472
|
|
|
$
|
1,910
|
|
Accrued compensation and benefits
|
|
|
2,828
|
|
|
|
2,543
|
|
Accrued property taxes
|
|
|
698
|
|
|
|
690
|
|
Other accrued liabilities
|
|
|
1,001
|
|
|
|
1,153
|
|
Current portion of long-term debt
|
|
|
3,126
|
|
|
|
2,064
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,125
|
|
|
|
8,360
|
|
Long-term debt
|
|
|
21,103
|
|
|
|
19,390
|
|
Other long-term obligations
|
|
|
2,189
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,417
|
|
|
|
30,000
|
|
Members capital
|
|
|
26,189
|
|
|
|
27,430
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
58,606
|
|
|
$
|
57,430
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
97
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue
|
|
$
|
65,556
|
|
|
$
|
66,962
|
|
|
$
|
67,041
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
20,360
|
|
|
|
21,707
|
|
|
|
22,308
|
|
Medical supplies expense
|
|
|
14,939
|
|
|
|
15,047
|
|
|
|
14,627
|
|
Bad debt expense
|
|
|
2,144
|
|
|
|
2,457
|
|
|
|
1,036
|
|
Other operating expenses
|
|
|
10,511
|
|
|
|
9,721
|
|
|
|
9,365
|
|
Depreciation
|
|
|
3,196
|
|
|
|
2,615
|
|
|
|
2,139
|
|
Loss on disposal of property, equipment and other assets
|
|
|
22
|
|
|
|
10
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
51,172
|
|
|
|
51,557
|
|
|
|
49,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,384
|
|
|
|
15,405
|
|
|
|
17,426
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,306
|
)
|
|
|
(1,322
|
)
|
|
|
(1,441
|
)
|
Interest and other income, net
|
|
|
165
|
|
|
|
159
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(1,141
|
)
|
|
|
(1,163
|
)
|
|
|
(988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,243
|
|
|
$
|
14,242
|
|
|
$
|
16,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
98
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
Sioux Falls
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss)
|
|
|
|
|
|
|
Hospital
|
|
|
North Central
|
|
|
|
|
|
Sioux Falls
|
|
|
North Central
|
|
|
|
|
|
|
|
|
|
Management,
|
|
|
Heart Institute
|
|
|
Avera
|
|
|
Hospital
|
|
|
Heart Institute
|
|
|
Avera
|
|
|
|
|
|
|
Inc.
|
|
|
Holdings, PLLC
|
|
|
McKennan
|
|
|
Management, Inc.
|
|
|
Holdings, PLLC
|
|
|
McKennan
|
|
|
Total
|
|
|
Balance, September 30, 2007
|
|
$
|
8,950
|
|
|
$
|
8,949
|
|
|
$
|
8,950
|
|
|
$
|
(94
|
)
|
|
$
|
(94
|
)
|
|
$
|
(94
|
)
|
|
$
|
26,567
|
|
Distributions to members
|
|
|
(4,254
|
)
|
|
|
(4,253
|
)
|
|
|
(4,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,760
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,480
|
|
|
|
5,479
|
|
|
|
5,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,438
|
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
(194
|
)
|
|
|
(193
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
$
|
10,176
|
|
|
$
|
10,175
|
|
|
$
|
10,176
|
|
|
$
|
(288
|
)
|
|
$
|
(288
|
)
|
|
$
|
(287
|
)
|
|
$
|
29,664
|
|
Distributions to members
|
|
|
(5,189
|
)
|
|
|
(5,189
|
)
|
|
|
(5,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,567
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,747
|
|
|
|
4,748
|
|
|
|
4,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,242
|
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
(303
|
)
|
|
|
(303
|
)
|
|
|
(909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
$
|
9,734
|
|
|
$
|
9,734
|
|
|
$
|
9,734
|
|
|
$
|
(591
|
)
|
|
$
|
(591
|
)
|
|
$
|
(590
|
)
|
|
$
|
27,430
|
|
Distributions to members
|
|
|
(4,689
|
)
|
|
|
(4,689
|
)
|
|
|
(4,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,067
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,415
|
|
|
|
4,414
|
|
|
|
4,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,243
|
|
Change in fair value of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139
|
)
|
|
|
(139
|
)
|
|
|
(139
|
)
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
9,460
|
|
|
$
|
9,459
|
|
|
$
|
9,459
|
|
|
$
|
(730
|
)
|
|
$
|
(730
|
)
|
|
$
|
(729
|
)
|
|
$
|
26,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
99
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
13,243
|
|
|
$
|
14,242
|
|
|
$
|
16,438
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
2,144
|
|
|
|
2,457
|
|
|
|
1,036
|
|
Depreciation
|
|
|
3,196
|
|
|
|
2,615
|
|
|
|
2,139
|
|
Amortization of loan acquisition costs
|
|
|
39
|
|
|
|
39
|
|
|
|
39
|
|
Loss on disposal of property, equipment and other assets
|
|
|
22
|
|
|
|
10
|
|
|
|
140
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,708
|
)
|
|
|
(1,294
|
)
|
|
|
(909
|
)
|
Medical supplies
|
|
|
87
|
|
|
|
(9
|
)
|
|
|
(90
|
)
|
Prepaid expenses and other assets
|
|
|
(182
|
)
|
|
|
856
|
|
|
|
(87
|
)
|
Accounts payable and accrued liabilities
|
|
|
219
|
|
|
|
(1,830
|
)
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
17,060
|
|
|
|
17,086
|
|
|
|
18,823
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,085
|
)
|
|
|
(3,613
|
)
|
|
|
(2,112
|
)
|
Proceeds from sale of property and equipment
|
|
|
5
|
|
|
|
6
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,080
|
)
|
|
|
(3,607
|
)
|
|
|
(2,094
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
5,455
|
|
|
|
1,780
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(2,680
|
)
|
|
|
(2,032
|
)
|
|
|
(1,586
|
)
|
Distributions to members
|
|
|
(14,067
|
)
|
|
|
(15,567
|
)
|
|
|
(12,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,292
|
)
|
|
|
(15,819
|
)
|
|
|
(14,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
1,688
|
|
|
|
(2,340
|
)
|
|
|
2,383
|
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
14,202
|
|
|
|
16,542
|
|
|
|
14,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
15,890
|
|
|
$
|
14,202
|
|
|
$
|
16,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,306
|
|
|
$
|
1,322
|
|
|
$
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
100
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
Heart Hospital of South Dakota, LLC, doing business as Avera
Heart Hospital of South Dakota, (the Company) is a
North Carolina limited liability company that was formed on
June 18, 1999 to develop, own, and operate an acute-care
hospital located in South Dakota, specializing in all aspects of
cardiology and cardiovascular surgery. The hospital commenced
operations on March 20, 2001. At September 30, 2010
and 2009, Sioux Falls Hospital Management, Inc., North Central
Heart Institute Holdings, PLLC, and Avera McKennan each held a
33 1/3 %
interest in the Company. See Note 9 for information
relative to the subsequent sale of Sioux Falls Hospital
Management, Inc.s interest, which was effective on
October 1, 2010.
Sioux Falls Hospital Management, Inc., an indirectly wholly
owned subsidiary of MedCath Corporation (MedCath),
acted as the managing member in accordance with the
Companys operating agreement through October 1, 2010
(see Note 9). The Company will cease to exist on
December 31, 2060, unless the members elect earlier
dissolution. The termination date may be extended for up to an
additional 40 years in five-year increments at the election
of the Companys board of directors.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the
financial statements and accompanying notes. There is a
reasonable possibility that actual results may vary
significantly from those estimates.
Fair Value of Financial Instruments The
Company considers the carrying amounts of significant classes of
financial instruments on the balance sheets to be reasonable
estimates of fair value at September 30, 2010 and 2009.
Cash Cash consists of currency on hand and
demand deposits with financial institutions.
Concentrations of Credit Risk The Company
grants credit without collateral to its patients, most of whom
are insured under payment arrangements with third-party payors,
including Medicare, Medicaid, and commercial insurance carriers.
The following table summarizes the percentage of net realizable
accounts receivable from all payors at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Medicare and Medicaid
|
|
|
38
|
%
|
|
|
42
|
%
|
Commercial and Other
|
|
|
53
|
%
|
|
|
51
|
%
|
Self-pay
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts Accounts
receivable primarily consist of amounts due from third-party
payors and patients. To provide for accounts receivable that
could become uncollectible in the future, the Company
establishes an allowance for doubtful accounts to reduce the
carrying value of such receivables to their estimated net
realizable value. The Company estimates this allowance based on
such factors as payor mix, aging and its historical collection
experience and write-offs.
Medical Supplies Medical supplies consist
primarily of supplies necessary for diagnostics, catheterization
and surgical procedures and general patient care and are stated
at the lower of
first-in,
first-out cost or market.
Property and Equipment Property and equipment
are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which generally
range from 25 to 40 years for buildings and improvements,
25 years for land improvements, and from 3 to 10 years
for equipment and software. Repairs and maintenance costs are
charged to operating expense while betterments are capitalized
as additions to the related
101
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets. Retirements, sales and disposals of assets are recorded
by removing the related cost and accumulated depreciation with
any resulting gain or loss reflected in income from operations.
Long-Lived Assets Long-lived assets are
evaluated for impairment when events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows
expected to result from the use of these assets and their
eventual disposition are less than their carrying amount. 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. 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. No
impairment charges of long-lived assets were necessary for the
years ended September 30, 2010 and 2009.
Other Assets Other assets include of loan
acquisition costs, which are costs associated with obtaining
long-term financing (Loan Costs). Loan Costs, net of
accumulated amortization, were $0.2 million as of
September 30, 2010 and 2009. The Loan Costs are being
amortized using the straight-line method, which approximates the
effective interest method, as a component of interest expense
over the life of the debt. Amortization expense recognized for
Loan Costs totaled $39,000 for the years ended
September 30, 2010, 2009 and 2008. At September 30,
2009, other assets also included the long-term portion of the
asset relating to the benefit for future physician services of
$0.5 million. This balance is now classified as current based on
the related physician agreement.
Revenue Recognition Amounts the Company
receives for treatment of patients covered by governmental
programs such as Medicare and Medicaid and other third-party
payors such as commercial insurers, health maintenance
organizations and preferred provider organizations are generally
less than established billing rates. Payment arrangements with
third-party payors may include prospectively determined rates
per discharge or per visit, a discount from established charges,
per diem payments, reimbursed costs (subject to limits)
and/or other
similar contractual arrangements. As a result, net revenue for
services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. The Company
accounts for the differences between the estimated realizable
rates under the reimbursement program and the standard billing
rates as contractual adjustments.
The majority of the Companys contractual adjustments are
system-generated at the time of billing based on either
government fee schedules or fee schedules contained in managed
care agreements with various insurance plans. Portions of the
Companys contractual adjustments are performed manually
and these adjustments primarily relate to patients that have
insurance plans with whom the Company does not have contracts
containing discounted fee schedules, also referred to as
non-contracted payors, patients that have secondary insurance
plans following adjudication by the primary payor, uninsured
self-pay patients and charity care patients. Estimates of
contractual adjustments are made on a payor-specific basis and
based on the best information available regarding the
Companys interpretation of the applicable laws,
regulations and contract terms. While subsequent adjustments to
the systematic contractual allowances can arise due to denials,
short payments deemed immaterial for continued collection effort
and a variety of other reasons, such amounts have not
historically been significant.
The Company continually reviews the contractual estimation
process to consider and incorporate updates to the laws and
regulations and any changes in the contractual terms of its
programs. Final settlements under some of these programs are
subject to adjustment based on audit by third parties, which can
take several years to determine. From a procedural standpoint,
the Company subsequently adjusts those settlements as new
information is obtained from audits or review by the fiscal
intermediary, and, if the result of the of the fiscal
intermediary audit or review impacts other unsettled and open
costs reports, then the Company recognizes the impact of those
adjustments. The Company cannot predict at this time what impact
the future audits by such third parties will have on the Company.
A significant portion of the Companys net revenue is
derived from federal and state governmental healthcare programs,
including Medicare and Medicaid, which, combined, accounted for
48%, 51% and 53%, respectively, of
102
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys net revenue during the years ended
September 30, 2010, 2009 and 2008. Medicare payments for
inpatient acute services and certain outpatient services are
generally made pursuant to a prospective payment system. Under
this system, a hospital is paid a prospectively-determined fixed
amount for each hospital discharge based on the patients
diagnosis. Specifically, each discharge is assigned to a
Medicare severity diagnosis-related group (MS-DRG).
Based upon the patients condition and treatment during the
relevant inpatient stay, each MS-DRG is assigned a fixed payment
rate that is prospectively set using national average costs per
case for treating a patient for a particular diagnosis. The
MS-DRG rates are adjusted by an update factor each federal
fiscal year, which begins on October 1. The update factor
is determined, in part, by the projected increase in the cost of
goods and services that are purchased by hospitals, referred to
as the market basket index. MS-DRG payments do not consider the
actual costs incurred by a hospital in providing a particular
inpatient service; however, MS-DRG payments are adjusted by a
predetermined adjustment factor assigned to the geographic area
in which the hospital is located.
While hospitals generally do not receive direct payment in
addition to a MS-DRG payment, hospitals may qualify for
additional capital-related cost reimbursement and outlier
payments from Medicare under specific circumstances. Medicare
payments for non-acute services, certain outpatient services,
medical equipment, and education costs are made based on a cost
reimbursement methodology and are under transition to various
methodologies involving prospectively determined rates. The
Company is reimbursed for cost-reimbursable items at a tentative
rate with final settlement determined after submission of annual
cost reports by the Company and audits thereof by the Medicare
fiscal intermediary. Medicaid payments for inpatient and
outpatient services are made at prospectively determined amounts
and cost based reimbursement, respectively.
The Company provides care to patients who meet certain criteria
under its charity care policy without charge or at amounts less
than its established rates. Any discounts provided to these
patients are recorded as a reduction to gross patient revenue.
During the years ended September 30, 2010, 2009 and 2008,
the Company provided charity care of $0.2 million,
$0.5 million and $0.1 million, respectively.
Advertising Advertising costs are expensed as
incurred. During the years ended September 30, 2010 and
2009, the Company incurred $0.5 million and for the year
ended September 30, 2008 , the Company incurred
$0.3 million of advertising expenses.
Income Taxes The Company has elected to be
treated as a limited liability company for federal and state
income tax purposes. As such, all taxable income or loss of the
Company is included in the income tax returns of the respective
members. Accordingly, no provision has been made for federal or
state income taxes in the accompanying financial statements.
Members Share of Net Income and Loss In
accordance with the membership agreement, net income and loss
are first allocated to the members based on their respective
ownership percentages. If the cumulative losses of the Company
exceed its initial capitalization and committed capital
obligations of its members, Sioux Falls Hospital Management,
Inc., the Companys managing member, will recognize a
disproportionate share of the Companys losses that
otherwise would be allocated to all of its members on a pro rata
basis. In such cases, Sioux Falls Hospital Management, Inc. will
recognize a disproportionate share of the Companys future
profits to the extent it has previously recognized a
disproportionate share of the Companys losses.
Subsequent Events In connection with
preparation of the financial statements for the year ended
September 30, 2010, the Company has evaluated subsequent
events for potential recognition and disclosures through
December 14, 2010, the date these financial statements were
issued. See Note 9.
New Accounting Pronouncements In August 2010,
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 financial
statements.
103
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
financial position or results of operations.
In December 2010, the FASB approved the issuance of an ASU
whereby a health care entity is required to present the
provision for bad debts as a component of net revenues within
the revenue section of the statement of operations. However, on
December 8, 2010, due to implementation and operational
concerns, the FASB decided to re-expose the issue for a
60-day
comment period. As currently drafted, a health care entity is
required to disclose the following by major payor sources of
revenue:
a. Its policy for considering collectability in the timing
and amount of revenue and bad debt recognized
|
|
|
|
b.
|
Patient service revenue (net of contractual allowances and
discounts) before any provision for bad debts
|
|
|
c.
|
A tabular reconciliation, describing the material activity in
the allowance for doubtful accounts for the period.
|
Public entities will be required to provide the new disclosures
and statement of operations presentation in fiscal years
beginning after December 15, 2010, and interim periods
within those years, with early adoption permitted. Nonpublic
entities will be required to provide the new disclosures and
statement of operations presentation in fiscal years beginning
after December 15, 2011, with early adoption permitted. The
requirement to report the provision for bad debts as a component
of net revenue will be applied retrospectively for all periods
presented, while the new disclosure requirements will be applied
prospectively. The Company is evaluating the potential impacts
the adoption of this ASU will have on our financial statements.
Market Risk The Companys policy for
managing risk related to its exposure to variability in interest
rates, commodity prices, and other relevant market rates and
prices includes consideration of 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 its risks. In addition, the Company may be
required to hedge some or all of its market risk exposure,
especially to interest rates, by creditors who provide debt
funding to the Company. The Company recognizes derivatives and
measures those instruments at fair value.
Accounts receivable, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
7,055
|
|
|
$
|
7,213
|
|
Other receivables
|
|
|
112
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,167
|
|
|
|
7,299
|
|
Allowance for doubtful accounts
|
|
|
(1,685
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
5,482
|
|
|
$
|
5,918
|
|
|
|
|
|
|
|
|
|
|
104
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Activity for the allowance for doubtful accounts for the years
ended September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
1,381
|
|
|
$
|
764
|
|
Bad debt expense
|
|
|
2,144
|
|
|
|
2,457
|
|
Write-offs, net of recoveries
|
|
|
(1,840
|
)
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
1,685
|
|
|
$
|
1,381
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
Property and equipment, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and improvements
|
|
$
|
1,384
|
|
|
$
|
1,384
|
|
Buildings and improvements
|
|
|
32,233
|
|
|
|
32,161
|
|
Equipment and software
|
|
|
23,737
|
|
|
|
23,007
|
|
Construction in progress
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,578
|
|
|
|
56,552
|
|
Less accumulated depreciation
|
|
|
(22,994
|
)
|
|
|
(22,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,584
|
|
|
$
|
33,769
|
|
|
|
|
|
|
|
|
|
|
Long-term debt at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Bank mortgage loan
|
|
$
|
17,694
|
|
|
$
|
19,200
|
|
|
|
|
|
|
|
|
|
|
Equipment loans
|
|
|
6,535
|
|
|
|
2,254
|
|
|
|
|
24,229
|
|
|
|
21,454
|
|
Less current portion
|
|
|
(3,126
|
)
|
|
|
(2,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,103
|
|
|
$
|
19,390
|
|
|
|
|
|
|
|
|
|
|
Bank Mortgage Loan The Companys bank
mortgage loan used to finance its building and land, was
refinanced during February 2006 to extend its maturity date
through December 2015 with an interest rate of the LIBOR rate
plus an applicable margin of 1.25%. At September 30, 2010
and 2009, the interest rate on this loan was 1.56%.
During the year ended September 30, 2006 the Company
entered into an interest rate swap (the Swap), to
fix the LIBOR at 5.21% for approximately 80% of the bank
mortgage loans outstanding balance. The Company accounts
for the Swap as a cash flow hedge against changes in interest
rates, and therefore the underlying liability reflected in these
disclosures is not measured at fair value. At September 30,
2010 and 2009, the Companys effective interest rate on the
notional amount of the Swap is 5.58% and 5.76%, effectively.
During fiscal 2010 and 2009, the Company recognized interest
expense based upon the fixed interest rate provided under the
Swap, while the change in the fair value of the Swap is recorded
as other comprehensive income (loss) and as an adjustment to the
derivative liability in the balance sheets. The derivative
liability was $2.2 million and $1.8 million at
September 30, 2010 and 2009, respectively, and is included
in other long-term obligations on the balance sheets. Future
changes in the fair value of the Swap will be recorded based
upon the variability in the market interest rates until maturity
in December 2015.
105
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The bank mortgage loan agreement contains certain restrictive
covenants, which require the maintenance of specific financial
ratios and amounts. The Company was in compliance with these
restrictive covenants at September 30, 2010.
Notes Payable to Equipment Lenders The
Company has acquired equipment under equipment loans
collateralized by the related equipment, which had a net book
value of approximately $6.3 million and $2.2 million
at September 30, 2010 and 2009, respectively. The Company
has acquired equipment under the following notes:
|
|
|
|
|
Date of Acquisition
|
|
Amount
|
|
June 2010
|
|
$
|
1,432
|
|
March 2010
|
|
|
1,629
|
|
October 2009
|
|
|
2,394
|
|
October 2008
|
|
|
1,779
|
|
January 2008
|
|
|
785
|
|
September 2007
|
|
|
348
|
|
Amounts borrowed under these notes are payable in monthly
installments of principal and interest over five-year terms. The
notes have annual fixed rates of interest ranging from 3.7% to
6.4%.
The Company also had a $2.5 million working capital line of
credit that was provided by the real estate lender, and was
subject to the interest rate, covenants, guarantee and
collateral of the real estate loan which was to expire in
December 2008. During fiscal 2009 it was extended to December
2010 and during October 2010 it was extended to December 2012.
No amounts were outstanding under this line of credit at
September 30, 2010 or 2009.
Future maturities of long-term debt, as of September 30,
2010, are as follows:
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2011
|
|
$
|
3,126
|
|
2012
|
|
|
3,200
|
|
2013
|
|
|
3,074
|
|
2014
|
|
|
2,703
|
|
2015
|
|
|
1,961
|
|
Thereafter
|
|
|
10,165
|
|
|
|
|
|
|
|
|
$
|
24,229
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
Operating Leases The Company leases certain
medical equipment under noncancelable operating leases. Total
rent expense under these operating leases was $94,000 during the
year ended September 30, 2010 and is included in other
operating expenses. There was no rent expense for noncancelable
operating leases during the year ended September 30, 2009.
Approximate future minimum payments are $94,000 for fiscal 2011
and nothing thereafter.
Commitments The Company provides guarantees
to certain non-investor physician groups for funds required to
operate and maintain services for the benefit of the
hospitals patients. These guarantees extend for the
duration of the underlying service agreements and the maximum
potential future payments that the Company could be required to
make under these guarantees was approximately $1.3 million
through March 2011 as of September 30, 2010. At
September 30, 2010 the Company has recorded a liability of
$0.5 million for the fair value of these guarantees, which
is in other accrued liabilities. Additionally, the Company has
recorded an asset of $0.5 million representing the future
services to be provided by the physicians, which is in prepaid
expenses and other current assets.
106
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contingencies Laws and regulations governing
the Medicare and Medicaid programs are complex, subject to
interpretation and may be modified. The Company believes that it
is in compliance with such laws and regulations and it is not
aware of any investigations involving allegations of potential
wrongdoing. However, compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action, including substantial
fines and criminal penalties, as well as repayment of previously
billed and collected revenue from patient services and exclusion
from the Medicare and Medicaid programs. Medicare and Medicaid
cost reports have been audited by the fiscal intermediary
through September 30, 2008 and September 30, 2007,
respectively.
In March 2010, the DOJ issued a civil investigative demand
(CID) pursuant to the federal False Claims Act to
one of MedCaths affiliated hospitals. The CID requested
information regarding Medicare claims submitted by that hospital
in connection with the implantation of implantable cardioverter
defibrillators (ICDs) during the period 2002 to the
present.
On September 17, 2010, MedCath received a letter from the
DOJ advising that an investigation is being conducted to
determine whether certain of its hospitals, including the
Company, 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 indicates
that many of MedCaths hospitals have claims for the
implantation of ICDs which were not medically indicated
and/or
otherwise violated Medicare payment policy. The Company
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. MedCath is fully
cooperating with the government in this investigation; to date,
the DOJ has not asserted any claim against the Company
specifically. Because MedCath is in the early stages of this
investigation, the Company is unable to evaluate the outcome of
this investigation.
The Company is involved in various claims and legal actions in
the ordinary course of business. Moreover, 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.
Management does not believe, taking into account the applicable
liability insurance coverage and the expectations of counsel
with respect to the amount of potential liability, the outcome
of any such claims and litigation, individually or in the
aggregate, will have a materially adverse effect on the
Companys financial position or results of operations.
|
|
7.
|
Related-Party
Transactions
|
MedCath provides working capital to the Company under a
revolving credit note with a maximum borrowing limit of
$12.0 million. The loan is collateralized by the
Companys accounts receivable from patient services. There
are no amounts outstanding under the working capital loan as of
September 30, 2010 and 2009. No interest was paid in fiscal
2010, 2009 or 2008 because the working capital loan was paid off
monthly.
MedCath allocated corporate expenses to the Company for costs in
the following categories, which are included in operating
expenses in the statements of income, during the years ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Management fees
|
|
$
|
1,318
|
|
|
$
|
1,330
|
|
|
$
|
1,349
|
|
Hospital employee group insurance
|
|
|
4,196
|
|
|
|
4,674
|
|
|
|
4,621
|
|
Other
|
|
|
446
|
|
|
|
104
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,960
|
|
|
$
|
6,108
|
|
|
$
|
6,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other category above consists primarily of support services
provided by MedCath and consolidated purchased services paid for
by MedCath for which it receives reimbursement at cost in lieu
of the Companys incurring these services directly. Support
services include but are not limited to training, treasury, and
development.
107
HEART
HOSPITAL OF SOUTH DAKOTA, LLC
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated purchased services include but are not limited to
insurance coverage, professional services, software maintenance
and licenses purchased by MedCath under its consolidated
purchasing programs and agreements with third-party vendors for
the direct benefit of the Company. At September 30, 2010
and 2009, $0.4 million and $30,000, respectively, was due
for these allocated expenses and is included in other accrued
liabilities.
The Company pays Avera McKennan and North Central Heart
Institute Holdings, PLLC for various services, including labor,
supplies and equipment purchases. The amounts paid during the
years ended September 30, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Avera McKennan
|
|
$
|
937
|
|
|
$
|
1,023
|
|
|
$
|
999
|
|
|
|
|
|
North Central Heart Institute Holdings
|
|
|
923
|
|
|
|
391
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,860
|
|
|
$
|
1,414
|
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company participates in MedCaths defined contribution
retirement savings plan (the 401(k) Plan), which
covers all employees. The 401(k) Plan allows eligible employees
to contribute from 1% to 50% of their annual compensation on a
pretax basis. The Company, at its discretion, may make an annual
contribution of up to 40% of an employees pretax
contribution, up to a maximum of 6% of compensation. The
Companys contributions to the 401(k) Plan were
$0.3 million during the years ended September 30,
2010, 2009 and 2008.
On October 1, 2010, Sioux Falls Hospital Management, Inc.
sold its interest in the Company to Avera McKennan, which then
became a
662/3%
owner of the Company. In conjunction with this transaction,
Sioux Falls Hospital Management, Inc. resigned as managing
member of the Company and the Company and MedCath entered into a
transitional services agreement whereby MedCath would continue
to provide certain management services to the Company through
July 31, 2011. In conjunction with the management services
agreement, MedCath also remitted $1.23 million for the
assumption on October 1, 2010 of employee health insurance
claims which had previously been the responsibility of MedCath.
MedCath remitted this amount to the Company on
September 30, 2010. The Company recorded liabilities of
approximately $0.6 million as of September 30, 2010
relative to this payment and the remaining $0.6 million was
recorded as a reduction of other operating expense for the year
ending September 30, 2010. The Companys 401(k) Plan
was transferred into a new plan as a result of the sale with no
impact to plan participants.
108
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
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 the end
of the fiscal year covered by this Annual Report on
Form 10-K,
that the Companys disclosure controls and procedures were
effective as of the end of the fiscal year covered by this
report 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
within the time periods specified in the SECs rules and
forms, and include 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.
No change in the Companys internal control over financial
reporting was made during the most recent fiscal quarter covered
by this report that materially affected, or is reasonably likely
to materially affect, the Companys internal control over
financial reporting.
Managements
Report on Internal Control Over Financial Reporting.
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting for the Company (as defined in Securities Exchange Act
Rule 13a-15(f)).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and board of directors regarding the preparation and fair
presentation of published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation and
the reliability of financial reporting. Moreover, projections of
any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
September 30, 2010. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our assessment, the
Companys internal control over financial reporting was
effective as of September 30, 2010 based on those criteria.
Deloitte & Touche LLP, an independent registered
public accounting firm, which audited the consolidated financial
statements included in this Annual Report on
Form 10-K,
has issued an attestation report on our internal control over
financial reporting, which is included below.
109
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MedCath Corporation
Charlotte, North Carolina
We have audited the internal control over financial reporting of
MedCath Corporation and subsidiaries (the Company)
as of September 30, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of
September 30, 2010 and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended and our report dated December 14, 2010
expressed an unqualified opinion on those financial statements
(such report expresses an unqualified opinion and includes an
explanatory paragraph regarding the change in accounting for
non-controlling interests effective October 1, 2009).
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
December 14, 2010
110
|
|
Item 9B.
|
Other
Information
|
None.
111
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by this Item with respect to directors
is incorporated by reference to information provided under the
headings Election of Directors, Corporate
Governance, Other Matters-Section 16(a)
Beneficial Ownership Compliance, Accounting and
Audit Matters-Audit Committee Financial Expert,
Executive Compensation and Other Information, and
elsewhere in the Companys proxy statement to be filed
hereafter in connection with the Annual Meeting of Stockholders
in 2011.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this Item is incorporated by
reference to information provided under the headings
Executive Compensation and Other Information and
Corporate Governance-Compensation of Directors and
elsewhere in the 2011 Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this Item is incorporated by
reference to information provided under the headings
Security Ownership of Certain Beneficial Owners and
Management and Executive Compensation and Other
Information-Equity Compensation Plan Information and
elsewhere in the 2011 Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions.
|
The information required by this Item is incorporated by
reference to information provided under the heading
Certain Transactions and elsewhere in the 2011 Proxy
Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this Item is incorporated by
reference to information provided under the heading
Accounting and Audit Matters and elsewhere in the
2011 Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a) (1) The financial statements as listed in the
Index under Part II, Item 8, are filed as part of this
report.
(2) Financial Statement Schedules. All schedules
have been omitted because they are not required, are not
applicable or the information is included in the selected
consolidated financial data or notes to consolidated financial
statements appearing elsewhere in this report.
(3) The following list of exhibits includes both exhibits
submitted with this report and those incorporated by reference
to other filings:
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Exhibit
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No.
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Description
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2
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.1
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Asset Purchase Agreement By and Between Heart Hospital of DTO,
LLC and Good Samaritan Hospital(14)
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2
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.2
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Assignment and Assumption Agreement by and between MedCath
Partners, LLC, Cape Cod Cardiac Cath, Inc., Cape Cod Hospital,
and Cape Cod Cardiology Services, LLC.(15)
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2
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.3
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Asset Purchase Agreement by and among Sun City Cardiac Center
Associates, Sun City Cardiac Center, Inc., MedCath Partners,
LLC, MedCath Incorporated, and Banner Health(17)
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2
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.4
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Asset Purchase Agreement made and entered into as of August 6,
2010 by and between VHS Of Phoenix, Inc., dba Phoenix Baptist
Hospital, and Arizona Heart Hospital, LLC
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112
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Exhibit
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No.
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Description
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2
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.5
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Equity Purchase Agreement by and between Avera McKennan as Buyer
and SFHM, Inc. as Seller dated as of August 27, 2010(19)
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2
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.6
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Asset Purchase Agreement made and entered into as of February
16, 2010 by and between St. Davids Healthcare Partnership,
L.P., LLP, and Heart Hospital IV, L.P.(20)
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3
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.1
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Amended and Restated Certificate of Incorporation of MedCath
Corporation(1)
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3
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.2
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Amended and Restated Bylaws of MedCath Corporation
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4
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.1
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Specimen common stock certificate(1)
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4
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.2
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Stockholders Agreement dated as of July 31, 1998 by and
among MedCath Holdings, Inc., MedCath 1998 LLC, Welsh, Carson,
Anderson & Stowe VII, L.P. and the several other
stockholders (the Stockholders Agreement)(1)
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4
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.3
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First Amendment to Stockholders agreement dated as of June
1, 2001 by and among MedCath Holdings, Inc., the KKR Fund and
the WCAS Stockholders(1)
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4
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.4
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Registration Rights Agreement dated as of July 31, 1998 by and
among MedCath Holdings, Inc., MedCath 1998 LLC, Welsh, Carson,
Anderson & Stowe VII, L.P., WCAS Healthcare Partners, L.P.
and the several stockholders parties thereto (the Registration
Rights Agreement)(1)
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4
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.5
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First Amendment to Registration Rights Agreement dated as of
June 1, 2001 by and among MedCath Holdings, Inc. and the persons
listed in Schedule I attached hereto(1)
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4
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.6
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Amended and Restated Credit Agreement, dated as of November 10,
2008, among MedCath Corporation, as a parent guarantor, MedCath
Holdings Corp., as the borrower, certain of the subsidiaries of
MedCath Corporation party thereto from time to time, as
subsidiary guarantors, Bank of America, N.A., as administrative
agent, swing line lender and letter of credit issuer, and each
of the lenders party thereto from time to time.(13)
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4
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.7
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Collateral Agreement, dated as of July 7, 2004, by and among
MedCath Corporation, MedCath Holdings Corp., the Subsidiary
Guarantors, as identified on the signature pages thereto and any
Additional Grantor (as defined therein) who may become party to
the Collateral Agreement, in favor of Bank of America, N.A., as
administrative agent for the ratable benefit of the banks and
other financial institutions from time to time parties to the
Credit Agreement, dated as of July 7, 2004, by and among the
MedCath Corporation, MedCath Holdings Corp. and the lenders
party thereto(7)
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4
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.8
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First Amendment dated as of August 13, 2010 to the Amended and
Restated Credit Agreement dated as of November 10, 2008, among
MedCath, MedCath Holdings Corp., as borrower, certain of the
subsidiaries of MedCath party thereto from time to time, as
subsidiary guarantors, Bank of America, N.A., as administrative
agent, swing line lender and letter of credit issuer, and each
of the lenders party thereto from time to time(18)
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10
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.1
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Operating Agreement of the Little Rock Company dated as of July
11, 1995 by and among MedCath of Arkansas, Inc. and several
other parties thereto (the Little Rock Operating Agreement)(1)(5)
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10
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.2
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First Amendment to the Little Rock Operating Agreement dated as
of September 21, 1995(1)(5)
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10
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.3
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Amendment to Little Rock Operating Agreement effective as of
January 20, 2000(1)(5)
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10
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.4
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Amendment to Little Rock Operating Agreement dated as of April
25, 2001(1)
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10
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.5
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Operating Agreement of Arizona Heart Hospital, LLC entered into
as of January 6, 1997 (the Arizona Heart Hospital Operating
Agreement)(1)(5)
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10
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.6
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Amendment to Arizona Heart Hospital Operating Agreement
effective as of February 23, 2000(1)(5)
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10
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.7
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Amendment to Operating Agreement of Arizona Heart Hospital, LLC
dated as of April 25, 2001(1)
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10
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.8
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Agreement of Limited Partnership of Heart Hospital IV, L.P. as
amended by the First, Second, Third and Fourth Amendments
thereto entered into as of February 22, 1996 (the Austin Limited
Partnership Agreement)(1)(5)
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10
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.9
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Fifth Amendment to the Austin Limited Partnership Agreement
effective as of December 31, 1997(1)(5)
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10
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.10
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Amendment to Austin Limited Partnership Agreement effective as
of July 31, 2000(1)(5)
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10
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.11
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Amendment to Austin Limited Partnership Agreement dated as of
March 30, 2001(1)
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10
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.12
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Amendment to Austin Limited Partnership Agreement dated as of
May 3, 2001(1)
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113
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Exhibit
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No.
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|
|
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Description
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10
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.13
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Guaranty made as of November 11, 1997 by MedCath Incorporated in
favor of HCPI Mortgage Corp(1)
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10
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.14
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Operating Agreement of Heart Hospital of BK, LLC amended and
restated as of September 26, 2001(the Bakersfield Operating
Agreement)(2)(5)
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10
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.15
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Second Amendment to Bakersfield Operating Agreement effective as
of December 1, 1999(1)(5)
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10
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.16
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Amended and Restated Operating Agreement of effective as of
September 6, 2002 of Heart Hospital of DTO, LLC (the Dayton
Operating Agreement)(6)(5)
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10
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.17
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Amendment to New Mexico Operating Agreement and Management
Services Agreement) effective as of October 1, 1998(1)(5)
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10
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.18
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Amended and Restated Operating Agreement of Heart Hospital of
New Mexico, LLC.(3)(5)
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10
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.19
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Amended and Restated Guaranty made as of October 1, 2001 by
MedCath Incorporated, St. Joseph Healthcare System, SWCA, LLC
and NMHI, LLC in favor of Health Care Property Investors, Inc.(3)
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10
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.20
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Operating Agreement of Heart Hospital of South Dakota, LLC
effective as of June 8, 1999 Sioux Falls Hospital Management,
Inc. and North Central Heart Institute Holdings, PLLC (the Sioux
Falls Operating Agreement)(1)(5)
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10
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.21
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First Amendment to Sioux Falls Operating Agreement of Heart
Hospital of South Dakota, LLC effective as of July 31, 1999(1)(5)
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10
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.22
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Limited Partnership Agreement of Harlingen Medical Center LP
effective as of June 1, 1999 by and between Harlingen Hospital
Management, Inc. and the several partners thereto(1)(5)
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10
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.23
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Operating Agreement of Louisiana Heart Hospital, LLC effective
as of December 1, 2000 by and among Louisiana Hospital
Management, Inc. and the several parties thereto (Louisiana
Operating Agreement)(1)(5)
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10
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.24
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Amendment to Louisiana Operating Agreement effective as of
December 1, 2000(1)(5)
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10
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.25
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Second Amendment to Louisiana Operating Agreement effective as
of December 1, 2000(1)(5)
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10
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.26
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Limited Partnership Agreement of San Antonio Heart
Hospital, L.P. effective as of September 17, 2001(2)(5)
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10
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.27
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Put/Call Agreement dated as of August 20, 2010 by and among
San Antonio Hospital Management, Inc., San Antonio
Holdings, Inc., MedCath Incorporated, S.A.H.H. Hospital
Management, LLC, and S.A.H.H. Investment Group, Ltd. and
S.A.H.H. Management Company, LLC.
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10
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.28
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Operating Agreement of Doctors Community Hospital, LLC effective
as of March 15, 2007
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10
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.29
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Call Agreement dated as of October 4, 2010 by and amount
Hualapai Mountain Medical Center Management, Inc. and the
undersigned Investor Members of Hualapai Mountain Medical
Center, LLC.
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10
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.30*
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1998 Stock Option Plan for Key Employees of MedCath Holdings,
Inc. and Subsidiaries(1)
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10
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.31*
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Outside Directors Stock Option Plan(1)
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10
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.32*
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Amended and Restated Directors Option Plan(4)
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10
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.33
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|
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Form of Heart Hospital Management Services Agreement(1)
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10
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.34*
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|
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Amended and Restated Employment Agreement dated September 30,
2005 by and between MedCath Corporation and Joan McCanless(8)
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10
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.35
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|
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Sample Agreement to Accelerate Vesting of Stock Options and
Restrict Sale of Related Stock Effective September 30, 2005(8)
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10
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.36
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Guaranty made as of December 28, 2005 by MedCath Corporation and
Harlingen Medical Center Limited Partnership in favor of HCPI
Mortgage Corp.(9)
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10
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.37*
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Employment agreement dated February 21, 2006, by and between
MedCath Corporation and O. Edwin French(10)
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10
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.38*
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MedCath Corporation 2006 Stock Option and Award Plan effective
March 1, 2006(12)
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10
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.39
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|
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Consulting agreement effective August 4, 2006 by and between
MedCath Incorporated and SSB Solutions(11)
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10
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.40*
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First Amendment to the September 30, 2005 Amended and Restated
Employment Agreement by and between MedCath Corporation and Joan
McCanless dated September 1, 2006(12)
|
114
|
|
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|
|
Exhibit
|
|
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|
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No.
|
|
|
|
Description
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|
|
10
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.41*
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|
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First Amendment to the February 21, 2006 Employment Agreement by
and between MedCath Corporation and O. Edwin French dated
September 1, 2006(12)
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10
|
.42
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|
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Operating Agreement of HMC Management Company, LLC, effective as
of June 29, 2007(5)
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10
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.43
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|
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Amended and Restated Operating Agreement of Coastal Carolina
Heart, LLC, effective as of July 1, 2007(5)
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10
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.44
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|
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Amended and Restated Limited Partnership Agreement of Harlingen
Medical Center, Limited Partnership, effective as of July 10,
2007(5)
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|
10
|
.45
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|
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Amended and Restated Operating Agreement of HMC Realty, LLC,
effective as of July 10, 2007(5)
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|
10
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.46*
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|
|
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Amendment to Amended and Restated Outside Directors Stock
Option Plan(14)
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|
10
|
.47*
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|
|
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Employment Agreement dated June 23, 2008 by and between MedCath
Corporation and David Bussone(16)
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|
10
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.48*
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|
|
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Employment, Confidentiality and Non-Compete Agreement by and
between MedCath Incorporated and James A Parker (Effective Date
February 18, 2001)
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|
10
|
.49*
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|
|
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Amendment to Employment, Confidentiality and Non-Compete
Agreement (Effective Date February 18, 2001) dated August 14,
2009 by and between MedCath Corporation and James A. Parker(16)
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21
|
.1
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|
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List of Subsidiaries
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|
23
|
.1
|
|
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Consent of Deloitte & Touche LLP, Independent Registered
Public Accounting Firm
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|
23
|
.2
|
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Consent of Deloitte & Touche LLP, Independent Auditors
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|
31
|
.1
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|
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Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
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Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
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Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
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Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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|
|
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* |
|
Indicates a management contract or compensatory plan or
agreement. |
|
(1) |
|
Incorporated by reference from the Companys Registration
Statement on
Form S-1
(File
no. 333-60278). |
|
(2) |
|
Incorporated by reference from the Companys Annual Report
on Form 10-K
for the fiscal year ended September 30, 2001. |
|
(3) |
|
Incorporated by reference from the Companys Quarterly
Report on Form
10-Q for the
quarter ended December 31, 2001. |
|
(4) |
|
Incorporated by reference from the Companys Quarterly
Report on Form
10-Q for the
quarter ended March 31, 2002. |
|
(5) |
|
Certain portions of these exhibits have been omitted pursuant to
a request for confidential treatment filed with the Commission. |
|
(6) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the fiscal year ended September 30, 2003. |
|
(7) |
|
Incorporated by reference from the Companys Registration
Statement on
Form S-4
(File No.
333-119170). |
|
(8) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended September 30, 2005. |
|
(9) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended December 31, 2005. |
|
(10) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006. |
|
(11) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2006. |
|
(12) |
|
Incorporated by reference from the Companys Annual Report
on
Form 10-K
for the year ended September 30, 2006. |
|
(13) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed November 14, 2008. |
115
|
|
|
(14) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q/A
for the quarter ended March 31, 2008. |
|
(15) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed January 5, 2009 |
|
(16) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed August 17, 2009 |
|
(17) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed October 1, 2009 |
|
(18) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed August 19, 2010 |
|
(19) |
|
Incorporated by reference from the Companys Current Report
on
Form 8-K
filed September 1, 2010 |
|
(20) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2010. |
116
Pursuant to the requirements of Section 13 or 15(d) 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
O. Edwin French
President, Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Name
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Title
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Date
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/s/ O.
Edwin French
O.
Edwin French
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|
President and Chief Executive Officer (principal executive
officer)
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December 14, 2010
|
|
|
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|
|
/s/ James
A. Parker
James
A. Parker
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|
Executive Vice President and
Chief Financial Officer
(principal financial officer)
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Lora
Ramsey
Lora
Ramsey
|
|
Vice President Controller
(principal accounting officer)
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Pamela
G. Bailey
Pamela
G. Bailey
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Woodrin
Grossman
Woodrin
Grossman
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Robert
S. Mccoy, Jr.
Robert
S. Mccoy, Jr.
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ James
A. Deal
James
A. Deal
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ Jacque
J. Sokolov, Md
Jacque
J. Sokolov, Md
|
|
Director
|
|
December 14, 2010
|
|
|
|
|
|
/s/ John
T. Casey
John
T. Casey
|
|
Director
|
|
December 14, 2010
|
117