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EXCEL - IDEA: XBRL DOCUMENT - MEDCATH CORP | Financial_Report.xls |
EX-32.2 - EX-32.2 - MEDCATH CORP | c19907exv32w2.htm |
EX-32.1 - EX-32.1 - MEDCATH CORP | c19907exv32w1.htm |
EX-31.2 - EX-31.2 - MEDCATH CORP | c19907exv31w2.htm |
EX-31.1 - EX-31.1 - MEDCATH CORP | c19907exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2011
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-33009
MEDCATH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 56-2248952 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) |
10720 Sikes Place, Suite 200
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(704) 815-7700
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(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 August 5, 2011, there were 20,436,291 shares of $0.01 par value common stock outstanding.
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | Unaudited Consolidated Financial Statements |
MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
(Unaudited)
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 113,669 | $ | 32,892 | ||||
Accounts receivable, net |
44,423 | 42,141 | ||||||
Income tax receivable |
| 6,188 | ||||||
Medical supplies |
10,338 | 10,540 | ||||||
Deferred income tax assets |
8,678 | 13,247 | ||||||
Prepaid expenses and other current assets |
12,259 | 13,339 | ||||||
Current assets of discontinued operations |
45,495 | 49,963 | ||||||
Total current assets |
234,862 | 168,310 | ||||||
Property and equipment, net |
143,815 | 174,287 | ||||||
Other assets |
22,416 | 15,983 | ||||||
Non-current assets of discontinued operations |
3,083 | 135,958 | ||||||
Total assets |
$ | 404,176 | $ | 494,538 | ||||
Current liabilities: |
||||||||
Accounts payable |
$ | 17,088 | $ | 15,550 | ||||
Income tax payable |
7,158 | | ||||||
Accrued compensation and benefits |
12,662 | 15,951 | ||||||
Other accrued liabilities |
16,126 | 16,155 | ||||||
Current portion of long-term debt and obligations under capital leases |
2,339 | 16,566 | ||||||
Current liabilities of discontinued operations |
13,533 | 36,291 | ||||||
Total current liabilities |
68,906 | 100,513 | ||||||
Long-term debt |
| 52,500 | ||||||
Obligations under capital leases |
4,295 | 5,999 | ||||||
Other long-term obligations |
3,062 | 5,053 | ||||||
Long-term liabilities of discontinued operations |
| 36,469 | ||||||
Total liabilities |
76,263 | 200,534 | ||||||
Commitments and contingencies (See Note 7) |
||||||||
Redeemable noncontrolling interest |
8,280 | 11,534 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued |
| | ||||||
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,270,012 issued and 20,315,651 outstanding at June 30, 2011 22,423,666 issued and 20,469,305 outstanding at September 30, 2010 |
216 | 216 | ||||||
Paid-in capital |
458,729 | 457,725 | ||||||
Accumulated deficit |
(103,916 | ) | (139,791 | ) | ||||
Accumulated other comprehensive loss |
| (444 | ) | |||||
Treasury stock, at cost; 1,954,361 shares at June 30, 2011 and September 30, 2010 |
(44,797 | ) | (44,797 | ) | ||||
Total MedCath Corporation stockholders equity |
310,232 | 272,909 | ||||||
Noncontrolling interest |
9,401 | 9,561 | ||||||
Total equity |
319,633 | 282,470 | ||||||
Total liabilities and equity |
$ | 404,176 | $ | 494,538 | ||||
See notes to unaudited consolidated financial statements.
3
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 91,839 | $ | 93,139 | $ | 273,617 | $ | 271,625 | ||||||||
Operating expenses: |
||||||||||||||||
Personnel expense |
31,514 | 31,090 | 96,490 | 93,950 | ||||||||||||
Medical supplies expense |
24,219 | 23,559 | 66,573 | 68,938 | ||||||||||||
Bad debt expense |
10,767 | 10,782 | 30,483 | 28,196 | ||||||||||||
Other operating expenses |
23,919 | 21,915 | 69,476 | 64,005 | ||||||||||||
Pre-opening expenses |
| | | 866 | ||||||||||||
Depreciation |
3,745 | 5,389 | 12,092 | 15,773 | ||||||||||||
Impairment of property and equipment |
810 | 22,813 | 20,358 | 37,513 | ||||||||||||
(Gain) loss on disposal of property, equipment
and other assets |
(212 | ) | 12 | (141 | ) | 43 | ||||||||||
Total operating expenses |
94,762 | 115,560 | 295,331 | 309,284 | ||||||||||||
Loss from operations |
(2,923 | ) | (22,421 | ) | (21,714 | ) | (37,659 | ) | ||||||||
Other income (expenses): |
||||||||||||||||
Interest expense |
(556 | ) | (1,050 | ) | (2,605 | ) | (3,046 | ) | ||||||||
Interest and other income |
76 | 56 | 615 | 141 | ||||||||||||
Loss on note receiveable |
| | | (1,507 | ) | |||||||||||
Gain on sale of unconsolidated affiliates |
| | 15,391 | | ||||||||||||
Equity in net earnings of unconsolidated affiliates |
303 | 1,391 | 1,679 | 3,984 | ||||||||||||
Total other income (expense), net |
(177 | ) | 397 | 15,080 | (428 | ) | ||||||||||
Loss from continuing operations before income taxes |
(3,100 | ) | (22,024 | ) | (6,634 | ) | (38,087 | ) | ||||||||
Income tax benefit |
(1,862 | ) | (8,818 | ) | (5,370 | ) | (15,840 | ) | ||||||||
Loss from continuing operations |
(1,238 | ) | (13,206 | ) | (1,264 | ) | (22,247 | ) | ||||||||
Income from discontinued operations, net of taxes |
15,260 | 2,745 | 53,475 | 1,283 | ||||||||||||
Net income (loss) |
14,022 | (10,461 | ) | 52,211 | (20,964 | ) | ||||||||||
Less: Net income attributable to noncontrolling interest |
(1,691 | ) | (2,355 | ) | (16,336 | ) | (5,718 | ) | ||||||||
Net income (loss) attributable to MedCath Corporation |
$ | 12,331 | $ | (12,816 | ) | $ | 35,875 | $ | (26,682 | ) | ||||||
Amounts attributable to MedCath Corporation common stockholders: |
||||||||||||||||
Loss from continuing operations, net of taxes |
$ | (3,088 | ) | $ | (14,823 | ) | $ | (8,754 | ) | $ | (27,298 | ) | ||||
Income from discontinued operations, net of taxes |
15,419 | 2,007 | 44,629 | 616 | ||||||||||||
Net income (loss) |
$ | 12,331 | $ | (12,816 | ) | $ | 35,875 | $ | (26,682 | ) | ||||||
(Loss) earnings per share, basic |
||||||||||||||||
Loss from continuing operations attributable to MedCath |
||||||||||||||||
Corporation common stockholders |
$ | (0.15 | ) | $ | (0.74 | ) | $ | (0.43 | ) | $ | (1.38 | ) | ||||
Income from discontinued operations attributable to MedCath |
||||||||||||||||
Corporation common stockholders |
0.76 | 0.10 | 2.21 | 0.03 | ||||||||||||
(Loss) earnings per share, basic |
$ | 0.61 | $ | (0.64 | ) | $ | 1.78 | $ | (1.35 | ) | ||||||
(Loss) earnings per share, diluted |
||||||||||||||||
Loss from continuing operations attributable to MedCath |
||||||||||||||||
Corporation common stockholders |
$ | (0.15 | ) | $ | (0.74 | ) | $ | (0.43 | ) | $ | (1.38 | ) | ||||
Income from discontinued operations attributable to MedCath |
||||||||||||||||
Corporation common stockholders |
0.76 | 0.10 | 2.21 | 0.03 | ||||||||||||
(Loss) earnings per share, diluted |
$ | 0.61 | $ | (0.64 | ) | $ | 1.78 | $ | (1.35 | ) | ||||||
Weighted average number of shares, basic |
20,245 | 19,897 | 20,132 | 19,823 | ||||||||||||
Dilutive effect of stock options and restricted stock |
7 | | 6 | | ||||||||||||
Weighted average number of shares, diluted |
20,252 | 19,897 | 20,138 | 19,823 | ||||||||||||
See notes to unaudited consolidated financial statements.
4
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
Redeemable | ||||||||||||||||||||||||||||||||||||||||
Accumulated | Noncontrolling | |||||||||||||||||||||||||||||||||||||||
Other | Total | Interest | ||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Treasury Stock | Noncontrolling | Equity | (Temporary | |||||||||||||||||||||||||||||||||
Shares | Par Value | Capital | Deficit | Loss | Shares | Amount | Interest | (Permanent) | Equity) | |||||||||||||||||||||||||||||||
Balance, September 30, 2010 |
22,424 | $ | 216 | $ | 457,725 | $ | (139,791 | ) | $ | (444 | ) | 1,954 | $ | (44,797 | ) | $ | 9,561 | $ | 282,470 | $ | 11,534 | |||||||||||||||||||
Stock awards, including cancelations and
income tax benefit |
18 | | 3,282 | | | | | | 3,282 | | ||||||||||||||||||||||||||||||
Tax withholdings for vested restricted
stock awards |
(172 | ) | | (2,278 | ) | | | | | | (2,278 | ) | | |||||||||||||||||||||||||||
Distributions to noncontrolling interest |
| | | | | | | (10,444 | ) | (10,444 | ) | (3,560 | ) | |||||||||||||||||||||||||||
Other transactions impacting
noncontrolling interest |
| | | | | | | (64 | ) | (64 | ) | 18 | ||||||||||||||||||||||||||||
Exercise of call of noncontrolling interest |
| | | | | | | | | (5,700 | ) | |||||||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||||||||||
Net income |
| | | 35,875 | | | | 10,348 | 46,223 | 5,988 | ||||||||||||||||||||||||||||||
Reclassification of amounts included
in net income, net of tax benefit (*) |
| | | | 444 | | | | 444 | | ||||||||||||||||||||||||||||||
Total comprehensive income |
46,667 | 5,988 | ||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2011 |
22,270 | $ | 216 | $ | 458,729 | $ | (103,916 | ) | $ | | 1,954 | $ | (44,797 | ) | $ | 9,401 | $ | 319,633 | $ | 8,280 | ||||||||||||||||||||
(*) | Tax expense was $286 for the nine months ended June 30, 2011. |
See notes to unaudited consolidated financial statements.
5
Table of Contents
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(In thousands)
(Unaudited)
Nine Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Net income (loss) |
$ | 52,211 | $ | (20,964 | ) | |||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Income from discontinued operations, net of taxes |
(53,475 | ) | (1,283 | ) | ||||
Bad debt expense |
30,483 | 28,196 | ||||||
Depreciation |
12,092 | 15,773 | ||||||
(Gain) loss on disposal of property, equipment and other assets |
(141 | ) | 43 | |||||
Share-based compensation expense |
3,282 | 2,380 | ||||||
Gain on sale of unconsolidated affiliates |
(15,391 | ) | | |||||
Amortization of loan acquisition costs |
1,104 | 745 | ||||||
Impairment of long-lived assets |
20,358 | 37,513 | ||||||
Equity in earnings of unconsolidated affiliates, net of distributions received |
(583 | ) | 3,397 | |||||
Deferred income taxes |
(11,586 | ) | (14,966 | ) | ||||
Change in assets and liabilities that relate to operations: |
||||||||
Accounts receivable |
(32,765 | ) | (33,174 | ) | ||||
Medical supplies |
202 | (1,455 | ) | |||||
Prepaid and other assets |
5,062 | (1,422 | ) | |||||
Accounts payable and accrued liabilities |
(7,221 | ) | 1,082 | |||||
Net cash provided by operating activities of continuing operations |
3,632 | 15,865 | ||||||
Net cash (used in) provided by operating activities of discontinued operations |
(16,633 | ) | 15,316 | |||||
Net cash (used in) provided by operating activities |
(13,001 | ) | 31,181 | |||||
Investing activities: |
||||||||
Purchases of property and equipment |
(2,295 | ) | (15,275 | ) | ||||
Proceeds from sale of property and equipment |
281 | 103 | ||||||
Changes in restricted cash |
(1,772 | ) | | |||||
Proceeds from sale of unconsolidated afffiliates |
24,851 | | ||||||
Net cash provided by (used in) investing activities of continuing operations |
21,065 | (15,172 | ) | |||||
Net cash provided by (used in) investing activities of discontinued operations |
232,469 | (2,168 | ) | |||||
Net cash provided by (used in) investing activities |
253,534 | (17,340 | ) | |||||
Financing activities: |
||||||||
Repayments of long-term debt |
(66,563 | ) | (10,625 | ) | ||||
Repayments of obligations under capital leases |
(1,869 | ) | (1,173 | ) | ||||
Distributions to noncontrolling interest |
(7,380 | ) | (9,334 | ) | ||||
Investment by noncontrolling interest |
| 109 | ||||||
Sale of equity interest in subsidiary |
| 140 | ||||||
Tax withholding of vested restricted stock awards |
(2,494 | ) | (293 | ) | ||||
Net cash used in financing activities of continuing operations |
(78,306 | ) | (21,176 | ) | ||||
Net cash used in financing activities of discontinued operations |
(52,387 | ) | (15,324 | ) | ||||
Net cash used in financing activities |
(130,693 | ) | (36,500 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
109,840 | (22,659 | ) | |||||
Cash and cash equivalents: |
||||||||
Beginning of period |
47,030 | 61,701 | ||||||
End of period |
$ | 156,870 | $ | 39,042 | ||||
Cash and cash equivalents of continuing operations |
113,669 | 24,203 | ||||||
Cash and cash equivalents of discontinued operations |
43,201 | 14,839 |
See notes to unaudited consolidated financial statements
6
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
(All tables in thousands, except percentages and per share data)
1. Business and Basis of Presentation
MedCath Corporation (the Company) primarily focuses on providing high acuity services, including
the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in
partnership with physicians. As of June 30, 2011, the Company had ownership interests in and
operated six hospitals, including five in which the Company owned a majority interest.
As noted below under Our Strategic Options Review Process during the quarter ended December 31,
2010, the Company sold three of its majority owned hospitals that were classified as discontinued
operations and its equity interest in one of its minority owned hospitals. As a result, at June
30, 2011, the Company owned interests in six hospitals. Each of the Companys hospitals is a freestanding, licensed general acute care hospital that provides a wide range of
health services with a majority focus on cardiovascular care. Each of the Companys hospitals has a
24-hour emergency room staffed by emergency department physicians. The Companys six hospitals
that comprise continuing operations have 533 licensed beds and are located in: Arizona, Arkansas,
California, Louisiana, New Mexico, and Texas. Subsequent to June 30, 2011, the Company disposed of
its interest in two hospitals located in Arkansas and New Mexico that had 167 licensed beds in
total. See Note 16.
The Company accounts for all but one of its owned and operated hospitals as consolidated
subsidiaries. The Company owns a noncontrolling interest in Harlingen Medical Center as of June 30,
2011. Therefore, the Company is unable to consolidate this hospitals results of operations and
financial position, but rather is required to account for its noncontrolling interest in this
hospital as an equity-method investment.
In addition to the hospitals, through May 4, 2011 the Company owned or managed seven cardiac
diagnostic and therapeutic facilities. On that date, the Company disposed of its interest in
ownership and/or management of these cardiac diagnostic and therapeutic facilities. Six of these
facilities were located at hospitals operated by other parties. These facilities offered invasive
diagnostic and, in some cases, therapeutic procedures. The Company also operated two mobile cardiac
catheterization laboratories which operated on set routes and offered only diagnostic procedures.
The Company refers to the diagnostics division that was disposed as MedCath Partners.
During fiscal 2010 and fiscal 2011, the Company entered into definitive agreements to sell its
interests in Arizona Heart Hospital (AzHH), Heart Hospital of Austin (HHA) and TexSan Heart
Hospital (TexSan) and MedCath Partners whose assets, liabilities, and operations are included
within discontinued operations. AzHH, HHA, TexSan and MedCath Partners were sold on October 1,
2010, November 1, 2010, December 31, 2010 and May 4, 2011, respectively. The results of operations
of these entities are reported as discontinued operations for all periods presented. See Note 3.
Our Strategic Options Review Process
On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic Options
Committee to consider the sale either of the Companys equity or the sale of its individual
hospitals and other assets. The Company retained Navigant Capital Advisors as its financial advisor
to assist in this process. Since announcing the exploration of strategic alternatives on March 1,
2010, the Company has completed several transactions, including:
| The disposition of AzHH in which the Company sold the majority of the hospitals assets
to Vanguard Health Systems for $32.0 million, plus retained working capital. The
transaction was completed effective October 1, 2010. |
| The disposition of the Companys wholly owned subsidiary that held 33.3% ownership of
Avera Heart Hospital of South Dakota (Sioux Falls, SD) to Avera McKennan for $20.0 million,
plus a percentage of the hospitals available cash. The transaction was completed October 1,
2010. |
| The disposition of HHA in which the Company and the physician owners sold substantially
all of the hospitals assets to St. Davids Healthcare Partnership L.P. for approximately
$83.8 million, plus retained working capital. The transaction was completed effective
November 1, 2010. |
| The disposition of the Companys approximate 27.0% ownership interest in Southwest
Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint ventures physician partners for
$7.0 million. The transaction was completed effective November 1, 2010. |
7
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
| The disposition of TexSan in which the Company sold the majority of the hospitals
assets to Methodist Healthcare System of San Antonio for $76.25 million, plus an adjustment
for retained working capital. The transaction was completed effective December 31,
2010. |
| The disposition of MedCath Partners in which the Company sold the majority of the
divisions assets to DLP Healthcare, a joint venture of Lifepoint Hospitals, Inc. and Duke
University Health System for $25.0 million. The transaction was completed effective May 4,
2011. |
| The disposition of the Companys 9.2% ownership interest in Coastal Carolina Heart
to New Hanover Regional Medical Center for $5.0 million. The transaction was completed in
May 2011. |
Basis of Presentation The Companys unaudited interim consolidated financial statements as
of June 30, 2011 and for the three and nine months ended June 30, 2011 and 2010 have been prepared
in accordance with accounting principles generally accepted in the United States of America
(GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). These unaudited interim consolidated financial statements reflect, in the opinion of
management, all material adjustments necessary to fairly state the results of operations and
financial position for the periods presented. All intercompany transactions and balances have been
eliminated.
Certain information and disclosures normally included in the notes to consolidated financial
statements have been condensed or omitted as permitted by the rules and regulations of the SEC,
although the Company believes the disclosures are adequate to make the information presented not
misleading. The unaudited interim consolidated financial statements and notes thereto should be
read in conjunction with the Companys audited consolidated financial statements and notes thereto
for the fiscal year ended September 30, 2010. During the nine months ended June 30, 2011, the
Company has not made any material changes in the selection or application of its critical
accounting policies that were set forth in its Annual Report on Form 10-K for the fiscal year ended
September 30, 2010.
Long-Lived Assets Long-lived assets, such as property, and equipment, and purchased intangible
assets subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible impairment, the Company first
compares undiscounted cash flows expected to be generated by an asset to the carrying value of the
asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash
flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.
Fair value is determined through various valuation techniques including, but not limited to,
discounted cash flow models, quoted market values and third-party independent appraisals. The
determination of whether or not long-lived assets have become impaired involves a significant level
of judgment in the assumptions underlying the approach used to determine the estimated future cash
flows expected to result from the use of those assets. Many factors and assumptions can impact the
estimates, including the future financial results of these hospitals, how the hospitals are
operated in the future, changes in health care industry trends and regulations, and the nature and
timing of the ultimate disposition of the assets. Changes in the Companys strategy, assumptions
and/or market conditions could significantly impact these judgments and require adjustments to
recorded amounts of long-lived assets, which could change by material amounts in subsequent
periods. The impairments recognized do not include the costs of closing the hospitals or other
future operating costs, which could be substantial. Accordingly, the ultimate net cash realized
from the hospitals could be significantly less than their impaired value.
Due to a decline in operating performance at certain hospitals during the first nine months of
fiscal 2010, the Company performed impairment tests using undiscounted cash flows to determine if
the carrying value of each hospitals long-lived assets were recoverable as of June 30, 2010. The
results indicated the current carrying value of the assets at those hospitals were not recoverable.
The Company compared the fair value of those assets to their respective carrying values in order
to determine the amount of impairment. The Company recognized impairment charges based on the
amount each group of assets carrying value exceeded its fair value. The Company recorded $37.5
million and $5.2 million of impairment charges to continuing operations and discontinued
operations, respectively during the nine months ended June 30, 2010. In addition, during the
second quarter of fiscal 2010, as discussed previously, the Board of Directors formed a Strategic
Options Committee to consider the sale either of the Companys equity or the sale of its individual
hospitals and other assets. In addition, the Company retained Navigant Capital Advisors as its
financial advisor to assist in this process.
8
Table of Contents
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Throughout the remainder of fiscal 2010 and ongoing, the Company continuously evaluates the
operating performance of the various hospitals and also evaluates the expressions of interest
received for its ownership interests in the various hospitals. As a result of such period
evaluations, the Company recorded an additional $29.4 million in impairment charges during the
fourth quarter of fiscal 2010 through continuing and discontinued operations. To date, some of
these assets have been sold at their carrying value. The impairment charges were recognized in the
period that new or updated information pertaining to clear market indications of fair value became
available. Such information included valid indications of interest, or signed letters of intent
from interested buyers of the underlying assets, or based on updated discounted cash flow models
using the Companys long-term forecasts for the underlying assets. The short-term impact to the
Companys forecasts have been negatively impacted in some markets by the strategic options process
as physician recruitment and the ability to implement growth strategies has become increasingly
more difficult due to the uncertainty surrounding the process.
Due to a decline in operating performance at two hospitals during the first six months of fiscal
2011 and the uncertainty created at those hospitals as a result of the Companys strategic options
process, the Company performed impairment tests using undiscounted cash flows to determine if the
carrying value of these hospitals long-lived assets were recoverable as of March 31, 2011. The
results indicated the carrying value of the assets at those hospitals were not recoverable. The
Company compared the fair value of those assets to their respective carrying values in order to
determine the amount of impairment. The Company recognized impairment charges based on the amount
each group of assets carrying value exceeded its fair value at that date. In addition, the
Company received an indicator of value for certain land during the third quarter of fiscal 2011
that was below the Companys carrying value. Accordingly, the Company recorded $0.8 million and
$19.5 million of impairment charges to continuing operations during the three and nine months ended
June 30, 2011, respectively.
See Note 14 for further discussions as to the Companys determination of fair value.
2. Recent Accounting Pronouncements
The following is a summary of new accounting pronouncements that have been adopted or that may
apply to the Company.
Recently Adopted Accounting Pronouncements
On October 1, 2010, the Company adopted a new accounting standard that amends the
consolidation guidance that applies to variable interest entities (VIE). The amendments
significantly affect the overall consolidation analysis. The provisions of this accounting standard
revise the definition and consideration of VIEs, primary beneficiary, and triggering events in
which a company must re-evaluate its conclusions as to the consolidation of an entity. The adoption
of this standard did not have an impact on the Companys consolidated financial statements.
Recent Accounting Pronouncements
In August 2010, the Financial Accounting Standards Board (the FASB) issued Accounting Standard
Updates (ASU) 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and
Related Insurance Recoveries, which clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance provided in this ASU is effective as of
the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the
Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our
consolidated financial statements.
In August 2010, the FASB issued ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity
Care for Disclosure, which requires a company in the healthcare industry to use its direct and
indirect costs of providing charity care as the measurement basis for charity care disclosures.
This ASU also requires additional disclosures of the method used to identify such costs. The
guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010,
fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our
consolidated financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs regarding
requirements for measuring fair value and for disclosing information about fair value measurements.
The amendments in this ASU explain how to measure fair value. They do not require additional fair
value measurements and are not intended to establish valuation standards or affect valuation
practices outside of financial reporting. The amendments in this ASU are to be applied
prospectively and are effective during interim and annual periods beginning after December 15,
2011, the second quarter of fiscal 2012 for the Company. It is not yet known what impact this ASU
will have on the Companys financial statements.
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of
Comprehensive Income to improve the comparability, consistency, and transparency of financial
reporting and to increase the prominence of items reported in other comprehensive income. To
increase the prominence of items reported in other comprehensive income, the FASB decided to
eliminate the option to present components of other comprehensive income as part of the statement
of changes in stockholders equity, among other amendments in this ASU. The amendments require that
all nonowner changes in stockholders equity be presented either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In the two-statement
approach, the first statement should present total net income and its components followed
consecutively by a second statement that should present total other comprehensive income, the
components of other comprehensive income, and the total of comprehensive income. The amendments in
this ASU do not change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. The amendments do not change
the option for an entity to present components of other comprehensive income either net of related
tax effects or before related tax effects, with one amount shown for the aggregate income tax
expense or benefit related to the total of other comprehensive income items. In both cases, the tax
effect for each component must be disclosed in the notes to the financial statements or presented
in the statement in which other comprehensive income is presented. The amendments in this ASU
should be applied retrospectively and are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, fiscal 2013 for the Company, with early adoption
permitted. The amendments do not require any transition disclosures.
In July 2011, the FASB issued ASU 2011-07, Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,
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. A health care entity that
recognizes significant amounts of patient services revenue at the time the services are rendered
even though it does not assess the patients ability to pay will be required to disclose the
following:
a. | Its policy for assessing the timing and amount of uncollectible patient service revenue
recognized as bad debts by major payor source of revenue; and |
b. | Qualitative and quantitative information about significant changes in the allowance for
doubtful accounts related to patient accounts receivable. |
Public entities will be required to provide these disclosures and statement of operations
presentation for fiscal years and interim periods within those years beginning after December 15,
2011, fiscal 2013 for the Company, with early adoption permitted. It is not yet known what impact
this ASU will have on the Companys 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 within current and non-current assets and current and long-term
liabilities of discontinued operations on the consolidated balance sheets.
Effective May 4, 2011 the Company sold the majority of the assets of its MedCath Partners division
to DLP Healthcare, a joint venture of LifePoint Hospitals, Inc. and Duke University Health
System. The transaction valued the assets sold at $25.0 million and involved the sale
of certain North Carolina-based assets related to the operation of cardiac catheterization
laboratories in North Carolina. MedCath has retained working capital related to the assets sold
and also retained assets related to cath labs leased to two health care systems outside of North
Carolina as well as its minority ownership in Coastal Carolina Heart. Further, MedCath retained
certain assets and liabilities arising from this business that arose before closing. The
transaction was completed effective May 4, 2011 with a gain of $21.3 million included in income
(loss) from discontinued operations for the nine months ended June 30, 2011. As the MedCath
Partners division met the criteria for classification as a discontinued operation, the previously
reported gains and losses on sale of its equity interests have also been reclassified to
discontinued operations. Such transactions are as follows:
| Effective May 5, 2011, MedCath Partners sold its 9.2% ownership interest in Coastal
Carolina Heart to New Hanover Regional Medical Center for $5.0 million and recognized a
gain of $4.6 million. |
| On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New
Jersey Heart Services, LLC for $0.6 million and recognized a gain of $0.2 million. |
| On November 1, 2010, MedCath Partners sold its equity interest in Southwest Arizona
Heart and Vascular Center, LLC for
$7.0 million. The Company recognized a $1.8 million write down of its investment in the
fourth quarter of fiscal 2010 to record the Companys investment in such business at its net
realizable value expected from the sale proceeds. |
| During February 2010, MedCath Partners Division of the Company sold its 15.0% interest
in Wilmington Heart Services, LLC for $0.4 million, resulting in an immaterial loss. |
10
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
During November 2010, the Company entered into an agreement to sell substantially all of the assets
of TexSan for $76.25 million, plus retained working capital. The transaction closed on December 31,
2010 with the Company retaining all accounts receivable and the hospitals remaining liabilities.
In addition, the Company acquired the partnerships minority investors ownership in accordance
with the terms of a call option agreement. See Note 7 for further discussion. The gain of $34.3
million has been included in income (loss) from discontinued operations for the nine months ended
June 30, 2011.
During September 2010, the Company entered into an agreement to sell its subsidiary that provided
consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.
Such subsidiarys operations had historically been included in the Corporate and other division.
Such subsidiary was sold in October 2010 for an immaterial loss.
During August 2010, the Company entered into a definitive agreement to sell certain of the hospital
assets and liabilities, plus certain net working capital of AzHH for $32.0 million and the
assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the
limited liability company which owned AzHH retaining all accounts receivable and the hospitals
remaining liabilities. As part of its assessment of long-lived assets in June 2010, the Company
recognized an impairment charge of $5.2 million based on its potential sales value of AzHH.
Accordingly, the Company recognized a nominal gain on the sale for the nine months ended June 30,
2011.
During February 2010, the Company entered into an agreement to sell substantially all of the assets
of HHA for $83.8 million plus retention of working capital to St. Davids Healthcare Partnership,
L.P. The transaction closed on November 1, 2010. The gain of $35.7 million has been included in
income (loss) from discontinued operations for the nine months ended June 30, 2011.
During May 2008, the Company sold the net assets of Dayton Heart Hospital (DHH) to Good
Samaritan Hospital pursuant to a definitive agreement. As of June 30, 2011 and September 30, 2010,
the Company had reserved $10.4 million and $9.8 million, respectively, for Medicare outlier
payments received by DHH during the year ended September 30, 2004, which are included in current
liabilities of discontinued operations in the consolidated balance sheets.
The Company has entered into transition services agreements with the buyers of certain of its sold
assets that extend into fiscal 2011. As a result, the Company entered into a Managed Services
Agreement with McKesson Technologies, Inc. (McKesson) whereby McKesson would employ the majority
of the Companys information technology employees effective November 1, 2010. In addition, to
facilitate collection of outstanding accounts receivable at such entities, on February 11, 2011 the
Company entered into a Master Agreement for Revenue Cycle Outsourcing with Dell Marketing L.P.
(Dell) whereby Dell would assume the responsibility for collection of outstanding accounts
receivable for our current and disposed of entities. Furthermore, Dell retained the services of
certain employees that had been employed by the Company on or before March 7, 2011 and effective
March 1, 2011, Dell has sublet certain space that had been previously utilized by Company personnel
involved in the collection of accounts receivable.
The results of operations and the assets and liabilities of discontinued operations included in the
consolidated statements of operations and consolidated balance sheets are as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 103 | $ | 62,123 | $ | 25,140 | $ | 190,672 | ||||||||
Gain from dispositions, net |
25,947 | | 95,850 | | ||||||||||||
Loss on early termination of debt |
| | (11,130 | ) | | |||||||||||
Income before income taxes |
24,808 | 3,828 | 81,232 | 866 | ||||||||||||
Income tax (benefit) expense |
9,548 | 1,083 | 27,757 | (417 | ) | |||||||||||
Net income |
15,260 | 2,745 | 53,475 | 1,283 | ||||||||||||
Less: Net loss (income) attributable to noncontrolling interest |
159 | (738 | ) | (8,846 | ) | (667 | ) | |||||||||
Net income attributable to MedCath Corporation |
$ | 15,419 | $ | 2,007 | $ | 44,629 | $ | 616 | ||||||||
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 43,201 | $ | 14,137 | ||||
Accounts receivable, net |
1,936 | 25,267 | ||||||
Other current assets |
358 | 10,559 | ||||||
Current assets of discontinued operations |
$ | 45,495 | $ | 49,963 | ||||
Property and equipment, net |
$ | 2,011 | $ | 123,605 | ||||
Other assets |
1,072 | 12,353 | ||||||
Long-term assets of discontinued operations |
$ | 3,083 | $ | 135,958 | ||||
Accounts payable |
$ | 11,514 | $ | 25,545 | ||||
Accrued liabilities and current portion of
obligations under capital leases |
2,019 | 10,746 | ||||||
Current liabilities of discontinued operations |
$ | 13,533 | $ | 36,291 | ||||
Long-term debt |
$ | | $ | 35,803 | ||||
Other long-term obligations |
| 666 | ||||||
Long-term liabilities of discontinued operations |
$ | | $ | 36,469 | ||||
Included in the Companys discontinued liabilities as of September 30, 2010 is a Real Estate
Investment Trust Loan (the REIT Loan) aggregating $34.6 million. Borrowings under this REIT Loan
were collateralized by a pledge of the Companys interest in the related hospitals property,
equipment and certain other assets. The REIT Loan required monthly, interest-only payments for ten
years, at which time the loan was due in full, maturing January 2016. The interest rate on this
loan was 8 1/2%. Upon the disposition of the Companys interest in the related hospital, the REIT
Loan was repaid in full in November 2010 and the Company incurred an $11.1 million prepayment
penalty, which is included in income (loss) from discontinued operations.
Included in discontinued operations are certain liabilities that the Company has retained upon the
disposition of the related entity. Because the Companys hospitals are organized as partnerships,
upon disposition of the related operations, assets and certain liabilities, the partnerships are
responsible for the resolution of outstanding payables, remaining obligations, including those
related to cost reports, medical malpractice and other obligations and wind down of the respective
tax filings of the partnership. The partnerships are also responsible for any unknown liabilities
that may arise. The Company has reported all known obligations in its consolidated balance sheets
as of June 30, 2011 and September 30, 2010.
4. Accounts Receivable
Accounts receivable, net, consists of the following:
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Receivables, principally from patients and third-party payors |
$ | 119,893 | $ | 103,314 | ||||
Other |
2,311 | 1,912 | ||||||
122,204 | 105,226 | |||||||
Less allowance for doubtful accounts |
(77,781 | ) | (63,085 | ) | ||||
Accounts receivable, net |
$ | 44,423 | $ | 42,141 | ||||
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
5. Investments in Affiliates
The Companys determination of the appropriate consolidation method to follow with respect to
investments in affiliates is based on the amount of control the Company has and the ownership level
in the underlying entity. Investments in entities that the Company does not control, but over whose
operations the Company has the ability to exercise significant influence (including investments
where the Company has a less than 20% ownership) are accounted for under the equity method. The
Company additionally considers if it is the primary beneficiary of (and therefore should
consolidate) any entity whose operations the Company does not control. At June 30, 2011, all of the
Companys investments in unconsolidated affiliates are accounted for using the equity method. At
June 30, 2011, the Company owns a noncontrolling interest in Harlingen Medical Center and certain
other partnerships, for which the Company neither has substantive control over the ventures nor is
the primary beneficiary. These investments are included in Other Assets on the consolidated balance
sheets. In addition to these investments, the Companys MedCath Partners division, which is
presented as a discontinued operation, owned and/or disposed of certain investments prior to its
disposition. Such investments and the gains/losses on dispositions are reflected in the assets and
activities of discontinued operations.
On October 1, 2010, the Company sold its interest in Avera Heart Hospital of South Dakota for
$25.1 million to Avera McKennan whereby Avera McKennan purchased a MedCath subsidiary which was the
indirect owner of a one-third ownership interest. Prior to its disposition, the Company had
accounted for its investment in Avera Heart Hospital of South Dakota using the equity method of
accounting. The Company recognized a gain on the disposition of $15.4 million. The Companys
investment in Avera Heart Hospital of South Dakota reflected its proportionate share of an interest
rate swap that the hospital had entered into. The cumulative unrealized loss of $0.5 million (net
of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with
the sale of the Companys ownership interest.
The following tables represent summarized combined financial information of the Companys
unconsolidated affiliates accounted for under the equity method (for those entities in which the
Company has disposed of its interest, the operating activities have been included through their
respective date of disposition):
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 27,437 | $ | 44,877 | $ | 84,787 | $ | 130,775 | ||||||||
Income from operations |
$ | 2,719 | $ | 6,391 | $ | 10,503 | $ | 18,551 | ||||||||
Net income |
$ | 812 | $ | 4,130 | $ | 4,677 | $ | 11,825 |
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Current assets |
$ | 23,578 | $ | 46,079 | ||||
Long-term assets |
$ | 75,710 | $ | 111,262 | ||||
Current liabilities |
$ | 11,995 | $ | 21,437 | ||||
Long-term liabilities |
$ | 96,337 | $ | 120,451 |
6. Long-Term Debt
Long-term debt consists of the following:
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Amended Credit Facility |
$ | | $ | 66,563 | ||||
Less current portion |
| (14,063 | ) | |||||
Long-term debt |
$ | | $ | 52,500 | ||||
On May 9, 2011 the Company used the net proceeds from the sale of MedCath Partners assets,
along with available cash, to repay the $30.2 million then outstanding under its credit facility
and also terminated the facility on that date.
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Senior Secured Credit Facility During November 2008, the Company amended and restated its then
outstanding senior secured credit facility (the Amended Credit Facility). The Amended Credit
Facility provided for a three-year term loan facility in the amount of $75.0 million (the Term
Loan) and a revolving credit facility in the amount of $85.0 million (the Revolver), which
included a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit
(of which $1.7 million were outstanding as of September 30, 2010) and a $10.0 million sub-limit for
swing-line loans. Borrowings under the Amended Credit Facility, excluding swing-line loans, bore
interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or the alternate
base rate plus the applicable margin. 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. As noted above, the Amended Credit Facility was terminated in
May 2011.
The Amended Credit Facility required compliance with certain financial covenants including a
consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test
and a consolidated total leverage ratio test. The Amended Credit Facility also contained customary
restrictions on, among other things, the Company and subsidiaries ability to incur liens; engage
in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and
repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions;
and enter into transactions with affiliates. The Amended Credit Facility contained events of
default, including cross-defaults to certain indebtedness, change of control events, and other
events of default customary for syndicated commercial credit facilities.
The Company was required to make mandatory prepayments of principal in specified amounts upon the
occurrence of certain events identified in the Amended Credit Facility and was permitted to make
voluntary prepayments of principal under the Amended Credit Facility. The Term Loan was subject to
amortization of principal in quarterly installments, which began March 31, 2010. The maturity date
of both the Term Loan and the Revolver was 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 contained modifications of certain financial
covenants and other requirements of the Amended Credit Facility; including, but not limited to:
modifications to certain definitions contained in the Amended Credit Facility, including the
definitions of certain financial terms to permit additional add backs (such as an add back for
charges and professional expenses incurred in connection with asset dispositions), subject to
maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics
derived in accordance with such definitions, for certain financial covenant calculations;
increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset
dispositions covenant to permit additional asset dispositions subject to no events of default and
require that any net cash proceeds from an asset disposition or series of dispositions in excess of
$50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan
amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver
or cash collateralize letters of credit to the extent outstanding and permanently reduce the
Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the
amount of such permanent commitment reductions. In addition, any mandatory prepayments of the
Revolver also reduced the revolving credit commitment by a corresponding amount.
The letters of credit were not permitted to remain outstanding after the full repayment of the Term
Loan in May 2011. Accordingly, effective May 2011, the Company cash collateralized the outstanding
letters of credit such that they could remain outstanding. Accordingly, the Company has included
$1.8 million of cash that is restricted by the outstanding letters of credit as an other noncurrent
asset.
Debt Covenants As of September 30, 2010, the Company was in compliance with all covenants
governing its outstanding debt.
Interest Rate Swap During the year ended September 30, 2006 one of the hospitals in which
the Company had a noncontrolling interest and accounted for under the equity method, entered into
an interest rate swap for purposes of hedging variable interest payments on long term debt
outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the
hospital whereby changes in the fair value of the interest rate swap flow through comprehensive
income of the hospital. The Company recorded its proportionate share of comprehensive income within
stockholders equity in the consolidated balance sheets based on the Companys ownership interest
in that hospital. However, as noted in Note 5, the cumulative unrealized loss of $0.5 million (net
of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with
the sale of the Companys ownership interest on October 1, 2010.
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
7. Contingencies and Commitments
Put and Call Options During August 2010, the Company entered into a put/call agreement with the
minority shareholders of one of its hospitals, whereby call and put options were added relative to
the Companys noncontrolling interest in the hospital. The call allowed the Company to acquire all
of the noncontrolling interest in the hospital owned by physician investors for the net amount of
the physician investors unreturned capital contributions adjusted upward for any proportionate
share of additional proceeds upon a disposition transaction. The put allowed the Companys
noncontrolling shareholders in the hospital to put their shares to the Company for the net amount
of the physician investors unreturned capital contributions. The noncontrolling shareholders
recorded basis in their partnership interest was zero prior to the amendment of this agreement.
Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9
million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its
call right and recognized additional redeemable noncontrolling interest of $2.2 million.
Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling
interest in this partnership together with amounts due from the noncontrolling shareholders into a
net obligation of $5.7 million, of which $4.6 million was paid during the nine months ended June
30, 2011 and $1.1 million remains in other accrued liabilities as of June 30, 2011.
During September 2010, the Company entered into a call agreement with other shareholders of
one of its hospitals whereby the Company may exercise the call right to purchase the noncontrolling
interest owned by physician investors for an amount equal to the net amount of the physician
investors unreturned capital contributions ($2.6 million and $2.7 million at June 30, 2011 and
September 30, 2010, respectively).
In January 2011, the Company entered into an agreement with the noncontrolling shareholders of one
of its hospitals whereby the Company obtained the right to sell all or substantially all of the
assets of that hospital. Concurrent with such amendment and as a condition thereto, an approval,
consent and proxy were obtained from the Companys noncontrolling members in the hospital. The
approval, consent and proxy allows the Company to sell all or substantially all of the assets of
that hospital and the Company will pay to the noncontrolling members the net amount of their
unreturned capital contributions ($3.5 million at June 30, 2011) adjusted upward for any
proportionate share of additional proceeds upon a disposition transaction.
Contingencies The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings, court decisions,
executive orders and freezes and funding reductions, all of which may significantly affect the
Company. In addition, reimbursement is generally subject to adjustment following audit by third
party payors, including commercial payors as well as the contractors who administer the Medicare
program for the Centers for Medicare and Medicaid Services (CMS).
Final determination of amounts due providers under the Medicare program often takes several years
because of such audits, as well as resulting provider appeals and the application of technical
reimbursement provisions. The Company believes that adequate provisions have been made for any
adjustments that might result from these programs; however, due to the complexity of laws and
regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted
and the other complexities involved in estimating net revenue, there is a possibility that recorded
estimates will change by a material amount in the future.
CMS uses recovery audit contractors (RAC) to detect Medicare overpayments not identified through
existing claims review mechanisms. RACs perform post-discharge audits of medical records to
identify Medicare overpayments resulting from incorrect payment amounts, non-covered services,
incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back
at claims up to three years old, provided that the claim was paid on or after October 1, 2007.
Claims identified as overpayments will be subject to the Medicare appeals process. The Health Care
Reform Laws expanded the RAC programs scope to include Medicaid claims by requiring all states to
enter into contracts with RACs by December 31, 2010. The Company believes the claims for
reimbursement submitted to the Medicare and Medicaid programs by the Companys facilities have been
accurate, however the Company is unable to reasonably estimate what the potential result of future
RAC audits or other reimbursement matters could be.
The Company is involved in various claims and legal actions in the ordinary course of
business, including malpractice claims arising from services provided to patients that have been
asserted by various claimants and additional claims that may be asserted for known incidents
through June 30, 2011. These claims and legal actions are in various stages, and some may
ultimately be brought to trial. Moreover, additional claims arising from services provided to
patients in the past and other legal actions may be asserted in the future. The Company is
protecting its interests in all such claims and actions and does not expect the ultimate resolution
of these matters to
have a material adverse impact on the Companys consolidated financial position, results of
operations or cash flows.
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
During fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to
carotid artery stent procedures performed during prior fiscal years at two of the Companys
hospitals. The U.S. Department of Justice (DOJ) initiated an investigation related to the
Companys return of these reimbursements. As a result of the DOJs investigation, the Company
negotiated settlement agreements with the DOJ whereby the Company paid $0.8 million to settle and
obtain releases from any federal civil false claims liability related to the DOJs investigation.
The DOJ allegations did not involve patient care, and related solely to whether the procedures were
properly reimbursable by Medicare. The settlement did not include any finding of wrong-doing or any
admission of liability. Both settlement agreements were executed during fiscal 2010.
On March 12, 2010, the United States Department of Justice (DOJ) issued a Civil Investigative
Demand (CID) to one of the Companys hospitals regarding implantable cardioverter defibrillators
(ICD) implantations. The CID was issued in connection with an ongoing, national investigation
relating to ICDs and Medicare coverage requirements for these devices. The CID requested certain
documents and patient medical records regarding the implantation of ICDs for the period 2002 to the
present. The Company has provided materials responsive to the CID.
On September 17, 2010, consistent with letters received by other hospitals and hospital systems,
DOJ sent a letter notifying the Company of DOJs investigation of eight Company hospitals regarding
ICD implantations. In its letter, DOJ stated that its review was preliminary and its data suggests
that Company hospitals may have submitted claims for ICDs and related services that were
inconsistent with Medicare policy.
Based upon the Companys legal advisors discussions and meetings with DOJ, the primary focus of
the investigations involves ICDs implanted since October 1, 2003 within prohibited timeframes
(i.e., timeframe violations). A timeframe violation involves an ICD implanted for primary
prevention (i.e., prevention of sudden cardiac death in patients without a history of induced or
spontaneous arrhythmias) within 30 days of a myocardial infarction, or within 90 days of a coronary
artery bypass graft or percutaneous transluminal coronary angioplasty. The timeframes do not apply
to ICDs implanted for secondary prevention (i.e., prevention of sudden cardiac death in patients
who have survived a prior cardiac arrest or sustained ventricular tachyarrhythmia).
On November 19, 2010, DOJ provided the Company a spreadsheet detailing instances (based upon DOJs
data) in which an ICD was implanted at the eight Company hospitals in potential violation of the
applicable timeframes. The data provided by DOJ is raw, and the Company understands that, as of
this date, such data had not been analyzed by DOJ. Additionally, DOJ confirmed that some of the
ICDs identified in its data as alleged timeframe violations were in fact appropriately implanted
and billed to Medicare, including those implanted for secondary prevention.
On February 17, 2011, legal counsel for the Company met with representatives of DOJ to discuss the
agencys review of the patient medical records provided in response to the CID. In addition to
discussing DOJs review process, DOJ reconfirmed that certain ICD implantations were not being
examined by the agency. As noted above, these include implantations prior to October 1, 2003 and
implantations for secondary (rather than primary) prevention. With respect to primary prevention
implantations, the Company discussed clinical comments supporting the implantations and agreed to
additional meetings and presentations regarding those implantations for other Company hospitals.
In that regard, the Company has engaged a physician-expert to assist with patient medical record
reviews.
During the period March 2011 through July 2011, legal counsel for the Company has met on multiple
occasions with representatives of DOJ to discuss the investigation and present preliminary findings
regarding an internal review of a Company hospital other. These preliminary findings were
submitted to DOJ, reviewed by its experts, and continue to be discussed by the parties. The
Company intends to similarly present and submit findings for its other hospitals under
investigation.
As discussed above, the Company has complied with all requests from DOJ for information, is
actively engaged in discussions with DOJ regarding the issues involved in the investigation, and
continues developing and presenting arguments supporting the ICD implantations. Pursuant to DOJs
request, the Company has entered into a tolling agreement that tolls the statute of limitations for
allegations related to ICDs until October 2011. To date, DOJ has not asserted any claims against
the Company and the Company expects to continue to have input into the investigation. Because the
investigation is in its early stages, however, the Company is unable to evaluate the outcome of the
investigations. The Companys total ICD net revenue is a material component of total net patient
revenue and the results of this investigation could have a material adverse effect on the Companys
financial condition, results of operations and cash flows and a
material adverse effect on the amount the Company is able to
distribute to its stockholders in connection with the proposed
liquidation and dissolution (see note 16).
16
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v.
Northridge Emergency Medical Group, et al. (2009) 45 Cal. 4th 497, that under
Californias Knox-Keene statute healthcare providers may not bill patients for covered emergency
out-patient services for which health plans or capitated payors are invoiced by the provider but
fail to pay the provider. The California Supreme Court held that the only recourse for healthcare
providers is to pursue the payors directly. The Prospect decision does not apply to amounts that
the health plan or capitated payor is not obligated to pay under the terms of the insureds policy
or plan. Although the decision only considered emergency providers and referred to HMOs and
capitated payors, future court decisions on how the so-called balance billing statute is
interpreted does pose a risk to healthcare providers that perform emergency or other out-patient
services in the state of California.
During October, 2009, a purported class action law suit was filed by an individual against the
Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the
plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare
Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits
the practice of balance billing for patients who are provided emergency services. On November 24,
2010, the court granted the Bakersfield Heart Hospitals motion to strike plaintiffs class
allegations, which the plaintiff appealed. Thereafter, the parties discussed settlement and the
matter settled in February 2011. The parties executed a Settlement and Release Agreement, and
plaintiff dismissed his Complaint with prejudice and his pending appeal. Local counsel has advised
that plaintiffs counsel could locate another class representative to reinstitute the case, but the
possibility became more remote as time passes due to the statute of limitations.
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
June 30 2011 and September 30, 2010, the total estimated liability for the Companys self-insured
retention on medical malpractice claims, including an estimated amount for incurred but not
reported claims, was $2.4 million and $2.5 million, respectively, which is included in other
accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based
on actuarial estimates using the Companys historical experience with claims and assumptions about
future events.
In addition to reserves for medical malpractice, the Company also maintains reserves for
self-insured workmans compensation, healthcare and dental coverage. As of October 9, 2010, the
Company entered into a guaranteed cost plan for workmans compensation. The Company was also
covered by a guaranteed cost program up to September 2007. From October 2007 through 2010, the
Company was self-insured with loss limitations of $250,000 per occurrence with no annual aggregate
limits. The total estimated reserve for self-insured liabilities for workmans compensation,
employee health and dental claims was $2.2 million and $3.3 million as of June 30, 2011 and
September 30, 2010, respectively, which is included in other accrued liabilities in the
consolidated balance sheets. The Company maintains this reserve based on historical experience with
claims. The Company maintains commercial stop loss coverage for health and dental insurance
programs of $175,000 per plan participant.
Commitments The Companys consolidated subsidiary hospitals provide guarantees to certain
physician groups for funds required to operate and maintain services for the benefit of the
hospitals patients including emergency care and anesthesiology services, among other services.
These guarantees extend for the duration of the underlying service agreements. As of June 30, 2011,
the maximum potential future payments that the Company could be required to make under these
guarantees was $25.6 million through May 2014. At June 30, 2011 the Company had total liabilities
of $10.0 million for the fair value of these guarantees, of which $7.5 million is in other accrued
liabilities and $2.5 million is in other long term obligations. Additionally, the Company had
assets of $10.5 million representing the future services to be provided by the physicians, of which
$7.5 million is in prepaid expenses and other current assets and $3.0 million is in other assets.
8. Earnings per Share Data
Basic The calculation of basic earnings per share includes 194,100 and 150,900 of restricted
stock units that have vested but as of June 30, 2011 and 2010, respectively, have not been
converted into common stock.
17
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Diluted The calculation of diluted earnings per share considers the potential dilutive effect
of options to purchase 782,562, and 971,637 shares of common stock at prices ranging from $9.95 to
$33.05, which were outstanding at June 30, 2011 and 2010, respectively. Dilutive options of 6,607
have been included in the calculation of diluted earnings (loss) per share for the three months
ended June 30, 2011. Dilutive options of 6,146 have been included in the calculation of diluted
earnings (loss) per share for the nine months ended June 30, 2011. Of the outstanding stock
options, 758,750 options have not been included in the calculation of diluted earnings per share
for the three and nine months ended June 30, 2011, because the options were anti-dilutive. No
options or restricted stock were included in the calculation of diluted earnings per share for the
three and nine months ended June 30, 2010, as the consideration of such shares would be
anti-dilutive due to the loss from continuing operations, net of tax.
9. Stock Based Compensation
Compensation expense from the grant of equity awards made to employees and directors are recognized
based on the estimated fair value of each award over each applicable awards vesting period. The
Company estimates the fair value of equity awards on the date of grant using either an
option-pricing model for stock options or the closing market price of the Companys stock for
restricted stock and restricted stock units. Stock based compensation expense is recognized on a
straight-line basis over the requisite service period for the awards that are ultimately expected
to vest. Stock based compensation expense recorded during the three and nine months ended June 30,
2011 was $0.4 million and $3.3 million, respectively. The associated tax benefits related to the
compensation expense recognized for the three and nine months ended June 30, 2011 was $0.2 million
and $1.3 million, respectively. Stock based compensation expense recorded during the three and
nine months ended June 30, 2010 was $0.6 million and $2.4 million, respectively. The associated
tax benefits related to the compensation expense recognized for the three and nine months ended
June 30, 2010 was $0.2 million and $1.0 million, respectively.
Stock Options
The following tables summarize the Companys stock option activity:
For the Three Months Ended | ||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Stock Options | Exercise Price | Stock Options | Exercise Price | |||||||||||||
Outstanding stock options, beginning of period |
854,812 | $ | 21.86 | 975,637 | $ | 22.14 | ||||||||||
Cancelled |
(72,250 | ) | 23.58 | (4,000 | ) | 16.91 | ||||||||||
Outstanding stock options, end of period |
782,562 | $ | 21.70 | 971,637 | $ | 22.17 | ||||||||||
For the Nine Months Ended | ||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Number of | Average | Number of | Average | |||||||||||||
Stock Options | Exercise Price | Stock Options | Exercise Price | |||||||||||||
Outstanding stock options, beginning of period |
932,137 | $ | 21.89 | 1,027,387 | $ | 22.25 | ||||||||||
Cancelled |
(149,575 | ) | 22.84 | (55,750 | ) | 23.80 | ||||||||||
Outstanding stock options, end of period |
782,562 | $ | 21.70 | 971,637 | $ | 22.17 | ||||||||||
18
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Restricted Stock Awards
During the three and nine months ended June 30, 2011 and the three months ended June 30, 2010, the
Company did not grant any shares of restricted stock to employees. During the nine months ended
June 30, 2010, the Company granted to employees 401,399 shares of restricted stock. Restricted
stock granted to employees, excluding executives of the Company, vest annually on December 31 over
a three year period. Executives of the Company (defined by the Company as vice president or
higher) received two equal grants of restricted stock. The first grant vests annually in equal
installments on December 31 over a three year period. The second grant vests annually on December
31 over a three year period if certain performance conditions are met. All unvested restricted
stock granted to employees becomes fully vested upon a change in control of the Company as defined
in the Companys 2006 Stock Option and Award Plan. During the nine months ended June 30, 2011 and
2010, the Company granted 43,200 and 89,600 shares of restricted stock units to directors,
respectively. No restricted stock units were granted during the three months ended June 30, 2011
and 2010. The restricted stock units granted to directors were fully vested at the date of grant.
The Compensation Committee approved the termination of the restricted stock unit plan under which
the restricted stock units were granted to directors and the units were paid to the directors in
shares of common stock on August 1, 2011. At June 30, 2011, the Company had $1.0 million of
unrecognized compensation expense associated with restricted stock awards.
The following tables summarize the Companys restricted stock award activity:
For the Three Months Ended | ||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Number of | Number of | |||||||||||||||
Restricted | Weighted- | Restricted | Weighted- | |||||||||||||
Stock Awards | Average | Stock Awards | Average | |||||||||||||
and Units | Grant Price | and Units | Grant Price | |||||||||||||
Outstanding restricted stock awards and units, beginning of period |
476,012 | $ | 8.53 | 1,025,700 | $ | 8.49 | ||||||||||
Vested |
(17,062 | ) | 7.98 | (37,800 | ) | 7.56 | ||||||||||
Cancelled |
(5,850 | ) | 7.40 | (52,870 | ) | 8.04 | ||||||||||
Outstanding restricted stock awards and units, end of period |
453,100 | $ | 8.57 | 935,030 | $ | 8.63 | ||||||||||
For the Nine Months Ended | ||||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Number of | Number of | |||||||||||||||
Restricted | Weighted- | Restricted | Weighted- | |||||||||||||
Stock Awards | Average | Stock Awards | Average | |||||||||||||
and Units | Grant Price | and Units | Grant Price | |||||||||||||
Outstanding restricted stock awards and units, beginning of period |
884,285 | $ | 8.67 | 654,327 | $ | 9.64 | ||||||||||
Granted |
43,200 | 13.89 | 490,999 | 7.24 | ||||||||||||
Vested |
(452,234 | ) | 9.33 | (141,695 | ) | 8.65 | ||||||||||
Cancelled |
(22,151 | ) | 7.68 | (68,601 | ) | 8.28 | ||||||||||
Outstanding restricted stock awards and units, end of period |
453,100 | $ | 8.57 | 935,030 | $ | 8.63 | ||||||||||
10. Reportable Segment Information
Through March 31, 2011, the Companys reportable segments consisted of the Hospital Division and
the MedCath Partners Division. However, during the third quarter of fiscal 2011, the Company
disposed of its interest in the Partners Division. Accordingly, the
Company has recast the presentation of the Partners Division as a discontinued operation (see Note
3). As a result, the Companys sole reporting segment is the Hospital Division.
19
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Financial information concerning the Companys operations by the reportable segment and Corporate
and other as of and for the periods indicated is as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue: |
||||||||||||||||
Hospital Division |
$ | 91,766 | $ | 93,030 | $ | 273,379 | $ | 271,293 | ||||||||
Corporate and other |
73 | 109 | 238 | 332 | ||||||||||||
Consolidated totals |
$ | 91,839 | $ | 93,139 | $ | 273,617 | $ | 271,625 | ||||||||
(Loss) income from
operations: |
||||||||||||||||
Hospital Division |
$ | 2,663 | $ | (18,188 | ) | $ | (6,953 | ) | $ | (27,569 | ) | |||||
Corporate and other |
(5,586 | ) | (4,233 | ) | (14,761 | ) | (10,090 | ) | ||||||||
Consolidated totals |
$ | (2,923 | ) | $ | (22,421 | ) | $ | (21,714 | ) | $ | (37,659 | ) | ||||
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Aggregate identifiable assets: |
||||||||
Hospital Division |
$ | 257,508 | $ | 417,656 | ||||
Corporate and other |
146,668 | 76,882 | ||||||
Consolidated totals |
$ | 404,176 | $ | 494,538 | ||||
Substantially all of the Companys net revenue in its Hospital Division is derived directly or
indirectly from patient services. The amounts presented for corporate and other primarily include
general overhead and administrative expenses and financing activities as components of (loss)
income from operations and certain cash and cash equivalents, prepaid expenses, other assets and
operations of the business not subject to separate segment reporting within identifiable assets.
The Hospital Division assets include $44.3 million and $165.7 million of assets related to
discontinued operations as of June 30, 2011 and September 30, 2010, respectively. The Corporate
and other assets include $4.2 million and $20.2 million of assets related to discontinued
operations as of June 30, 2011 and September 30, 2010, respectively.
11. Business Ownership Changes
Change in Ownership Due to Cancellation of Stock Subscription Receivable Upon the formation of
Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements
whereby they paid for their ownership in two installments. At the date of formation, the amount
due from the minority owners was recorded as a stock subscription receivable. During the fourth
quarter of fiscal 2010, several minority owners did not submit the final installment. As a result,
and per the partnership operating agreement, the proportionate ownership was transferred to the
Company and the stock subscription receivable was reduced accordingly. As a result, the Companys
ownership in HMMC increased from 79.00% to 82.49%.
12. Comprehensive (Loss) Income
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 14,022 | $ | (10,461 | ) | $ | 52,211 | $ | (20,964 | ) | ||||||
Changes in fair value of interest rate swap,
net of tax benefit |
| (67 | ) | | (35 | ) | ||||||||||
Reclassification of amounts included in net
income,
net of tax expense |
| | 444 | | ||||||||||||
Comprehensive income (loss) |
14,022 | (10,528 | ) | 52,655 | (20,999 | ) | ||||||||||
Less: Net income attributable to
noncontrolling interest |
(1,691 | ) | (2,355 | ) | (16,336 | ) | (5,718 | ) | ||||||||
Comprehensive income (loss) attributable to
MedCath Corporation common stockholders |
$ | 12,331 | $ | (12,883 | ) | $ | 36,319 | $ | (26,717 | ) | ||||||
20
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
13. Property and Equipment
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Land |
$ | 15,412 | $ | 17,635 | ||||
Buildings |
134,483 | 149,704 | ||||||
Equipment |
128,333 | 131,581 | ||||||
Construction in progress |
545 | 25 | ||||||
Total, at cost |
278,773 | 298,945 | ||||||
Less accumulated depreciation |
(134,958 | ) | (124,658 | ) | ||||
Property and equipment, net |
$ | 143,815 | $ | 174,287 | ||||
The Company recorded $0.8 million and $20.4 million of impairment charges to the consolidated
statement of operations during the three and nine months ended June 30, 2011. See Note 1 for
further discussion related to these impairment charges.
14. Fair Value Measurements
The Companys non-financial assets and liabilities not permitted or required to be measured at fair
value on a recurring basis typically relate to long-lived assets held and used and long-lived
assets held for sale (including investments in affiliates). Fair values are determined as follows:
| Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities, which generally are not applicable to non-financial assets and liabilities. |
| Level 2 inputs utilize data points that are observable, such as independent third party
market offers. |
| Level 3 inputs are unobservable data points for the asset or liability, and include
situations where there is little, if any, market activity for the asset or liability, such
as internal estimates of discounted cash flows or third party appraisals. |
Impairment for | ||||||||||||||||
Quoted | Significant | the three | ||||||||||||||
Market | Significant Other | Unobservable | month period | |||||||||||||
Price | Observable Inputs | Inputs | ended June 30, | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | 2011 | |||||||||||||
Long-lived assets held and used |
$ | | $ | | $ | 4,045 | $ | 810 |
Quoted | Significant | Impairment for | ||||||||||||||
Market | Significant Other | Unobservable | the nine month | |||||||||||||
Price | Observable Inputs | Inputs | period ended | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | June 30, 2011 | |||||||||||||
Long-lived assets held and used |
$ | | $ | | $ | 48,745 | $ | 20,358 |
As described in Note 1, the Company recorded an impairment charge of $19.5 million for the
write-down of buildings and equipment in the Hospital Division. The charge relates to two of the
Companys hospitals in which there was a decline in the fair value of equipment based on discounted
cash flows. In addition, the Company recorded an impairment charge of $0.8 million for the write-down of land in the Corporate and other segment.
Based on Level 2 inputs, the fair value of long-term debt, including the current portion, at
September 30, 2010 was $108.1 million ($41.5 million related to discontinued operations) as
compared to carrying values of $101.2 million ($34.6 million related to discontinued operations).
The fair value of the Companys variable rate debt was determined to approximate its carrying value
due to the underlying variable interest rates.
The Companys cash equivalents are measured utilizing Level 1 inputs.
21
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
15. Section 382 Rights Plan
On June 13, 2011, the Company entered into the Section 382 Rights Plan (the Rights Plan), between
the Company and American Stock Transfer & Trust Company, LLC as rights agent. In connection with
the adoption of the Rights Plan, on June 13, 2011, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (the Rights) for each outstanding share of common
stock of the Company under the terms of the Plan. The dividend was paid on June 29, 2011 to the
stockholders of record as of the close of business on June 29, 2011 (the Record Date). Each
Right entitles the registered holder to purchase from the Company one one-thousandths of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the
Preferred Stock) at a price of $20.00 per one one-thousandths of a share of Preferred Stock,
subject to adjustment.
By adopting the Plan, the Board is seeking to preserve for the Companys stockholders the value or
availability of certain of the Companys tax attributes (the Tax Attributes). The Company
currently has Tax Attributes which may entitle the Company to either reduce income taxes that may
otherwise become due or to seek a refund of income taxes due with respect to the Companys current
fiscal 2011 tax year totaling up to as much as $40.0 million of tax reductions. These Tax
Attributes may be materially reduced or eliminated by a change of ownership of the Company under
Section 382 of the Internal Revenue Code (a change of ownership). If a change of ownership were
to occur, the actual amount of Tax Attributes that could be materially reduced or eliminated would
depend upon various factors, which among others include: (i) when the change of ownership occurred,
(ii) the order in which certain hospitals owned by the Company are sold, (iii) the final sale price
of certain hospitals owned by the Company and (iv) the timing of the liquidation of certain of the
Companys subsidiary limited liability companies or limited partnerships which have already sold
their hospitals. Generally, a change of ownership will occur if the percentage of the Companys
stock owned by one or more five percent stockholders increases by more than fifty percentage
points over the lowest percentage of stock owned by such stockholders at any time during the prior
three-year period or, if sooner, since the last change of ownership experienced by the Company.
The Plan is intended to act as a deterrent to any person acquiring 4.99% or more of the outstanding
shares of the Companys Common Stock or any existing 4.99% or greater holder from acquiring any
additional shares without the approval of the Board. This would mitigate the threat that share
ownership changes present to the Companys Tax Attributes because changes in ownership by a person
owning less than 4.99% of the Common Stock are not included in the calculation of change of
ownership for purposes of Section 382 of the Internal Revenue Code. The Plan includes a procedure
whereby the Board may consider requests to exempt certain proposed acquisitions of Common Stock
from the applicable ownership trigger if the Board determines that the requested acquisition will
not limit or impair the value or availability of the Tax Attributes to the Company.
The Rights will cause substantial dilution to a person or group that acquires 4.99% or more of the
Common Stock on terms not approved by the Companys Board of Directors. The Rights should not
interfere with any merger or other business combination approved by the Board at any time prior to
the first date that a person or group has become an Acquiring Person.
16. Subsequent Events
At the annual shareholders meeting on July 26, 2011, the majority of the Companys
shareholders approved the disposition of the Companys equity in Arkansas Heart Hospital and, along
with the Companys physician partners, to sell certain assets and liabilities of Heart Hospital of
New Mexico (the Transactions). Accordingly, the Company closed on the Transactions on August 1,
2011.
As the entities disposed of pursuant to the above Transactions did not qualify for discontinued
operations treatment as of June 30, 2011, their assets and liabilities and results of operations
are included in continuing operations. Accordingly, the Company has presented the supplementary
results of operations and the assets and liabilities of these businesses as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue |
$ | 49,759 | $ | 50,811 | $ | 148,798 | $ | 146,628 | ||||||||
Income before income taxes |
$ | 4,431 | $ | 6,183 | $ | 19,897 | $ | 17,389 | ||||||||
Net income attributable to noncontrolling interest |
$ | (1,101 | ) | $ | (1,491 | ) | $ | (5,108 | ) | $ | (4,111 | ) |
22
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MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
June 30, | September 30, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 9,793 | $ | 9,684 | ||||
Accounts receivable, net |
22,034 | 21,156 | ||||||
Other current assets |
8,730 | 9,898 | ||||||
Current assets |
$ | 40,557 | $ | 40,738 | ||||
Property and equipment, net |
$ | 64,270 | $ | 69,390 | ||||
Other assets |
1,259 | 2,091 | ||||||
Long-term assets |
$ | 65,529 | $ | 71,481 | ||||
Accounts payable |
$ | 9,279 | $ | 7,013 | ||||
Accrued liabilities and current portion of
obligations under capital leases |
11,677 | 14,863 | ||||||
Current liabilities |
$ | 20,956 | $ | 21,876 | ||||
Obligations under capital leases, less current portion |
$ | 3,641 | $ | 5,044 | ||||
Other long-term obligations |
1,003 | 1,798 | ||||||
Long-term liabilities |
$ | 4,644 | $ | 6,842 | ||||
On August 5, 2011 the Company filed a proxy statement seeking (a) shareholder approval to sell
all or substantially all of the remaining assets of the Company prior to filing a certificate of
dissolution and approval of a series of distributions in complete liquidation of the Company (as
defined in Section 346(a) of the Internal Revenue code of 1986, as amended), and (b) shareholder
approval to dissolve the Company and the Plan of Complete Liquidation and Dissolution pursuant to
which the Company will be dissolved. If shareholder approval to
dissolve the Company is obtained and the Board of Directors adopts a
plan of dissolution then the Company will change its basis of
accounting from the going-concern basis to the liquidation basis of
accounting.
23
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the interim unaudited consolidated financial statements and related
notes included elsewhere in this report, as well as the audited consolidated financial statements
and related notes thereto and Managements Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended September 30, 2010.
Overview
General. We are a healthcare provider focused primarily on providing high acuity services,
including the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in
partnership with physicians whom we believe have established reputations for clinical excellence.
As noted below, during the first quarter of fiscal 2011, we sold three of our majority owned
hospitals and our equity interest in one of our minority owned hospitals. As a result, at June 30,
2011, we owned interests in six hospitals, with a total of 533 licensed beds, of which 489 are
staffed and available, and that are located in: Arizona, Arkansas, California, Louisiana, New
Mexico and Texas. Each of our 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. Subsequent to June 30, 2011, we disposed of our interest in two hospitals located in
Arkansas and New Mexico that had 167 licensed beds.
In addition to our hospitals, through May 4, 2011, we owned and/or managed seven cardiac
diagnostic and therapeutic facilities. On that date, we disposed of our interest in these
facilities. Six of these facilities were located at hospitals operated by other parties. These
facilities offered invasive diagnostic and, in some cases, therapeutic procedures. The remaining
facility was not located at a hospital and offered only diagnostic procedures. The Company also
operated two mobile cardiac catheterization laboratories which operate on set routes and offer only
diagnostic procedures. We refer to our diagnostics division as MedCath Partners.
On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee
to consider the sale either of the Company or the sale of our individual hospitals and other
assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process.
Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed
several transactions, including the disposition of Arizona Heart Hospital, the disposition of our
wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota, the
disposition of Heart Hospital of Austin, the disposition of our approximate 27.0% ownership
interest in Southwest Arizona Heart and Vascular, LLC, the disposition of TexSan Heart Hospital and
the disposition of our MedCath Partners division. Since the completion of these sales (occurring
before June 30, 2011), we have received $143.6 million in
total cash proceeds, net of partner distributions and currently
estimate that we may receive an additional $27.0 million to $28.0 million after we complete the
liquidation of any remaining working capital and the estimated payment of income taxes for the
legal entities we continue to own, but prior to any estimate for any unknown
liabilities and contingencies. This estimate will be updated periodically during the wind-down of
these entities.
Since March 1, 2010, we have incurred approximately $14.9 million in expenses directly related to
the strategic options process. These costs include legal, consulting, board fees, retention
bonuses and closing costs related to transactions. Our strategic options costs will continue to be
material and we may incur material costs related to contingencies that are currently unknown.
We cannot assure our investors that our continuing efforts to
enhance stockholder value as part of our strategic options process will be successful. We do not know whether our stockholders
will approve the proposals included in the August proxy which was filed on
August 5, 2011 as part of our strategic options process.
If those proposals are approved, we do not know whether we will be able to successfully sell our interests in our remaining hospitals and our other remaining assets.
Although the strategic options process is on-going and expected to continue throughout fiscal 2012 and possibly beyond, we have begun to consider a number of scenarios for
distributing available cash to our stockholders such as liquidating distributions as part of a plan of complete liquidation and as part of the dissolution of the Company
as described in the August Proxy. However, many other unknown variables will affect the amount, timing and mechanics of any potential liquidating distributions to stockholders.
Final amounts available to stockholders will be diminished or affected by the payment or establishment of reserves to satisfy any liabilities arising out of the ICD investigation (see Note 7),
other currently unknown or unanticipated liabilities and the establishment of a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate
under the applicable law with respect to additional liabilities that may arise or be identified in connection with and after the dissolution of the Company which is described in the August Proxy,
asset and corporate wind-down related operating and other expenses (all of which liabilities and reserves may be material), as well as the realization of certain tax attributes, approvals
that may be required to sell our remaining assets, the inability to collect all amounts owed to us and other unforeseen events.
Revenue Sources by Payor. We receive payments for our services rendered to patients from the
Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our
patients directly. Generally, our net revenue is impacted by a number of factors, including the
payor mix, the number and nature of procedures performed and the rate of payment for the
procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the
proportion of net revenue we derive from the Medicare
program is higher than that of most general acute care hospitals.
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The following table sets forth the percentage of consolidated net revenue we earned by category of
admitting payor in the periods indicated.
Consolidated | Consolidated | |||||||||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
Payor | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Medicare |
50.9 | % | 51.8 | % | 51.6 | % | 52.4 | % | ||||||||
Medicaid |
4.1 | % | 6.1 | % | 4.5 | % | 5.1 | % | ||||||||
Commercial and other, including self-pay |
45.0 | % | 42.1 | % | 43.9 | % | 42.5 | % | ||||||||
Total consolidated net revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
A significant portion of our net revenue is derived from federal and state governmental
healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive
from the Medicare program as a percentage of total consolidated net revenue will remain significant
in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement,
market and industry trends with self-pay patients, and other similar factors.
The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and
prospective rate adjustments, administrative rulings, court decisions, audits, investigations,
executive orders and freezes and funding reductions, all of which may significantly affect our
business. In addition, reimbursement is generally subject to adjustment and possible recoupment
following audit by all third party payors, including commercial payors and the contractors who
administer the Medicare program for the Center for Medicare and Medicaid Services (CMS) as well
as the Office of Inspector General. Final determination of amounts due providers under the Medicare
program often takes several years because of such audits, as well as resulting provider appeals and
the application of technical reimbursement provisions. We believe that adequate provision has been
made for any adjustments that might result from these programs; however, due to the complexity of
laws and regulations governing the Medicare and Medicaid programs, the manner in which they are
interpreted and the other complexities involved in estimating our net revenue, there is a
possibility that recorded estimates will change by a material amount in the future.
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Results of Operations
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Statement of Operations Data. The following table presents our results of operations in dollars and
as a percentage of net revenue for the periods indicated:
Three Months Ended June 30, | ||||||||||||||||||||
(in thousands except percentages) | ||||||||||||||||||||
Increase/ | ||||||||||||||||||||
(Decrease) | % of Net Revenue | |||||||||||||||||||
2011 | 2010 | % | 2011 | 2010 | ||||||||||||||||
Net revenue |
$ | 91,839 | $ | 93,139 | (1.4 | )% | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel expense |
31,514 | 31,090 | 1.4 | % | 34.3 | % | 33.4 | % | ||||||||||||
Medical supplies expense |
24,219 | 23,559 | 2.8 | % | 26.4 | % | 25.3 | % | ||||||||||||
Bad debt expense |
10,767 | 10,782 | (0.1 | )% | 11.7 | % | 11.5 | % | ||||||||||||
Other operating expenses |
23,919 | 21,915 | 9.1 | % | 26.0 | % | 23.5 | % | ||||||||||||
Depreciation |
3,745 | 5,389 | (30.5 | )% | 4.1 | % | 5.8 | % | ||||||||||||
Impairment of property and equipment |
810 | 22,813 | 100.0 | % | 0.9 | % | 24.5 | % | ||||||||||||
(Gain) loss on disposal of property, equipment
and other assets |
(212 | ) | 12 | 1866.7 | % | | | |||||||||||||
Loss from operations |
(2,923 | ) | (22,421 | ) | (87.0 | )% | (3.2 | )% | (24.1 | )% | ||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest expense |
(556 | ) | (1,050 | ) | (47.0 | )% | (0.5 | )% | (1.1 | )% | ||||||||||
Interest and other income |
76 | 56 | 35.7 | % | | | ||||||||||||||
Equity in net earnings of unconsolidated affiliates |
303 | 1,391 | (78.2 | )% | 0.3 | % | 1.5 | % | ||||||||||||
Loss from continuing operations before
income taxes |
(3,100 | ) | (22,024 | ) | (85.9 | )% | (3.4 | )% | (23.7 | )% | ||||||||||
Income tax benefit |
(1,862 | ) | (8,818 | ) | (78.9 | )% | (2.0 | )% | (9.5 | )% | ||||||||||
Loss from continuing operations |
(1,238 | ) | (13,206 | ) | (90.6 | )% | (1.2 | )% | (14.2 | )% | ||||||||||
Income from discontinued operations, net of taxes |
15,260 | 2,745 | 455.9 | % | 16.6 | % | 2.9 | % | ||||||||||||
Net income (loss) |
14,022 | (10,461 | ) | (234.0 | )% | 15.3 | % | (11.2 | )% | |||||||||||
Less: Net income attributable to noncontrolling interest |
(1,691 | ) | (2,355 | ) | (28.2 | )% | (1.8 | )% | (2.5 | )% | ||||||||||
Net income (loss) attributable to MedCath Corporation |
$ | 12,331 | $ | (12,816 | ) | (196.2 | )% | 13.4 | % | (13.8 | )% | |||||||||
Amounts attributable to MedCath Corporation common stockholders: |
||||||||||||||||||||
Loss from continuing operations, net of taxes |
$ | (3,088 | ) | $ | (14,823 | ) | (79.2 | )% | (3.4 | )% | (15.9 | )% | ||||||||
Income from discontinued operations, net of taxes |
15,419 | 2,007 | 668.3 | % | 16.8 | % | 2.2 | % | ||||||||||||
Net income (loss) |
$ | 12,331 | $ | (12,816 | ) | (196.2 | )% | 13.4 | % | (13.8 | )% | |||||||||
Three Months Ended June 30, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
Selected Operating Data (a): |
||||||||||||
Number of hospitals |
5 | 5 | ||||||||||
Licensed beds (b) |
421 | 421 | ||||||||||
Staffed and available beds (c) |
380 | 380 | ||||||||||
Admissions (d) |
4,779 | 4,835 | (1.2 | )% | ||||||||
Adjusted admissions (e) |
7,249 | 7,300 | (0.7 | )% | ||||||||
Patient days (f) |
17,672 | 18,223 | (3.0 | )% | ||||||||
Adjusted patient days (g) |
26,939 | 27,546 | (2.2 | )% | ||||||||
Average length of stay (days) (h) |
3.70 | 3.77 | (1.9 | )% | ||||||||
Occupancy (i) |
51.1 | % | 52.7 | % | ||||||||
Inpatient catheterization procedures (j) |
2,002 | 2,048 | (2.2 | )% | ||||||||
Inpatient surgical procedures (k) |
1,125 | 1,216 | (7.5 | )% | ||||||||
Hospital net revenue (in thousands except percentages) |
$ | 91,766 | $ | 93,030 | (1.4 | )% |
(a) | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing
operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in
our consolidated financial statements. |
|
(b) | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether
the beds are actually available for patient use. |
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(c) | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. |
|
(d) | Admissions represent the number of patients admitted for inpatient treatment. |
|
(e) | Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. |
|
(f) | Patient days represent the total number of days of care provided to inpatients. |
|
(g) | Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days
by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. |
|
(h) | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. |
|
(i) | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the
number of staffed and available beds. |
|
(j) | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals
catheterization labs during the period. |
|
(k) | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
Net Revenue. Our consolidated net revenue decreased 1.4% or $1.3 million, to $91.8 million for the
third quarter of fiscal 2011 from $93.1 million for the third quarter of fiscal 2010.
Inpatient net revenue declined 0.4%, while inpatient cases increased 0.4% in the third quarter of
fiscal 2011 compared to the same period of the prior year. Inpatient net patient revenue was 67.3%
and 68.9% of total net patient revenue for the fiscal quarter ending June 30, 2011 and June 30,
2010, respectively. Total cardiovascular related inpatient net
revenue was 68.4% of total net
inpatient revenue for the third fiscal quarter of 2011 versus 69.1% for the third fiscal quarter of
fiscal 2010. The decline in cardiovascular related net revenue as a percentage of total net
inpatient revenue is a direct result of the net revenue from Hualapai Mountain Medical Center
(HMMC), our general acute care hospital which began operations at the beginning of fiscal 2010
and a decline in cardiovascular procedures with high reimbursement rates such as open heart and
AICD procedures.
Our outpatient net patient revenue increased 7.3% during the third quarter of fiscal 2011 compared
to the same period of the prior year. Our outpatient cases, excluding emergency department visits,
increased 9.2% during the third fiscal quarter ending June 30, 2011 compared to the same period of
the prior year. Our emergency department visits increased 8.0% during the third quarter ending
June 30, 2011 compared to the same period of the prior year. Our outpatient net revenue benefited
from a 9.5% increase in outpatient cases at HMMC, which has seen an increase in cases since it
began operations at the beginning of fiscal 2010.
Net revenue for the third quarter of fiscal 2011 included charity care deductions of $1.7 million
compared to charity care deductions of $1.4 million for the third quarter of fiscal 2010. The
increase is the result of more uninsured patients applying and qualifying for charity care.
Personnel expense. Our consolidated hospital division personnel expense increased 1.4%, or $0.4
million, to $31.5 million, or 34.3% of net revenue, for the third quarter of fiscal 2011 from $31.1
million, or 33.4% of net revenue, for the third quarter of fiscal 2010.
The $0.4 million increase in personnel expense is due an increase in cases at certain of our
hospitals. This increase was offset by a $0.7 million decline in hospital division bonus expense
due to certain hospitals not meeting bonus targets based on year-to-date operating results.
Medical supplies expense. Our consolidated medical supplies expense increased 2.8%, or $0.6
million, to $24.2 million for the third quarter of fiscal 2011 from $23.6 million for the third
quarter of fiscal 2010.
The $0.6 million increase in medical supplies expense is a result of an increase in cases utilizing
high dollar orthopedic devices and an increase in chargeable medical supplies at one of our
hospitals as a result of an increase length of stay. These increases were offset by a reduction in
sales tax expense on certain medical supplies. We have been able to reduce our overall sales tax
expense on medical supplies at certain of our hospitals as a result of a sales tax review completed
during the first fiscal quarter of 2011.
Bad debt expense. Our consolidated bad debt expense decreased 0.1% to $10.8 million for the third
quarter of fiscal 2011 from $10.8 million for the third quarter of fiscal 2010. As a percentage of
net revenue, bad debt expense increased slightly to 11.7% for the third
quarter of fiscal 2011 as compared to 11.5% for the comparable period of fiscal 2010.
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Our net accounts receivable primarily includes amounts due from patients and third-party payors and
amounts due for third-party payor settlements. Third-party payor settlements include amounts due
related to prior filed cost reports and estimated future cost report filings. Our net accounts
receivable due from patients and third-party payors, excluding amounts due for the settlement of
cost reports, was $44.4 million at June 30, 2011 and $44.3 million, at June 30, 2010. Our
third-party net accounts payable for the settlement of cost reports was $2.4 million and $2.9
million as of June 30, 2011 and 2010, respectively. Of this amount, $2.1 million and $2.6 million
was related to prior fiscal year cost reports as of June 30, 2011 and 2010, respectively.
We compute our allowance for doubtful accounts based on a liquidation percentage by hospital. This
liquidation (or bad debt) percentage is based on a twelve month hindsight analysis computed on a
monthly basis while considering any current trends or changes in payor mix that could impact
historical collection percentages. We reserve for the estimate of uncollectible self-pay accounts
at the time the revenue is recognized. As a result, an increase in self-pay admissions will
increase the bad debt expense and the allowance for doubtful accounts most significantly in the
period in which the service is rendered.
Our net patient accounts receivable outstanding by payor group excluding amounts due from
third-party payors for the settlement of cost reports as of June 30, 2011 and 2010 was as follows:
Net Patient Accounts Receivable | ||||||||
Outstanding | ||||||||
(in thousands) | ||||||||
Payor Group | June 30, 2011 | June 30, 2010 | ||||||
Medicare |
$ | 16,281 | $ | 15,933 | ||||
Medicaid (1) |
3,183 | 3,683 | ||||||
Self-pay (2) |
5,675 | 4,826 | ||||||
Commercial & Other |
19,388 | 18,792 | ||||||
Total |
$ | 44,527 | $ | 43,234 | ||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. |
|
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance
or government program assistance (34.1% and 18.3% of total self-pay net accounts receivable
outstanding at June 30, 2011 and 2010, respectively) and the self-pay portion due after
insurance and government programs (65.9% and 81.7% of total self-pay net accounts receivable
outstanding at June 30, 2011 and 2010, respectively). |
The below table reflects the percentage of net patient accounts receivable, excluding amounts due
for the settlement of cost reports, by aging group as of June 30, 2011:
Days Outstanding | ||||||||||||||||||||||||||||
As of June 30, 2011 | ||||||||||||||||||||||||||||
Payor Group | 0-30 | 31-60 | 61-120 | 121-150 | 151-180 | +181 | Total | |||||||||||||||||||||
Medicare |
55.7 | % | 25.0 | % | 16.1 | % | 13.6 | % | 10.9 | % | 4.6 | % | 36.6 | % | ||||||||||||||
Medicaid (1) |
4.4 | % | 9.6 | % | 12.5 | % | 8.1 | % | 10.8 | % | 9.0 | % | 7.1 | % | ||||||||||||||
Self-pay (2) |
1.7 | % | 6.9 | % | 17.1 | % | 28.6 | % | 21.1 | % | 54.6 | % | 12.7 | % | ||||||||||||||
Commercial & Other |
38.2 | % | 58.5 | % | 54.3 | % | 49.7 | % | 57.2 | % | 31.8 | % | 43.6 | % | ||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. |
|
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance
or government program assistance. |
The below table reflects the percentage of net patient accounts receivable, excluding amounts due
for the settlement of cost reports, by aging group as of June 30, 2010:
Days Outstanding | ||||||||||||||||||||||||||||
As of June 30, 2010 | ||||||||||||||||||||||||||||
Payor Group | 0-30 | 31-60 | 61-120 | 121-150 | 151-180 | +181 | Total | |||||||||||||||||||||
Medicare |
55.5 | % | 22.1 | % | 11.1 | % | 3.9 | % | 10.1 | % | 7.5 | % | 36.9 | % | ||||||||||||||
Medicaid (1) |
4.7 | % | 9.7 | % | 12.5 | % | 19.9 | % | 26.8 | % | 13.3 | % | 8.5 | % | ||||||||||||||
Self-pay (2) |
0.7 | % | 5.6 | % | 16.6 | % | 30.4 | % | 27.9 | % | 54.8 | % | 11.2 | % | ||||||||||||||
Commercial & Other |
39.1 | % | 62.6 | % | 59.8 | % | 45.8 | % | 35.2 | % | 24.4 | % | 43.4 | % | ||||||||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
(1) | Medicaid includes accounts receivable that are pending approval from Medicaid. |
|
(2) | Self-pay net accounts receivable includes patients registered as self-pay with no insurance
or government program assistance. |
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For the quarter ended June 30, 2011, bad debt expense was 11.7% of net patient revenue, compared
to 11.5% in the prior year. Our days sales outstanding for our hospital division net accounts
receivable, excluding amounts due from third-party payors related to the settlement of cost
reports, were 44 and 43 at June 30, 2011 and 2010, respectively.
Other operating expenses. Our consolidated other operating expenses increased 9.1%, or $2.0 million
to $23.9 million for the third quarter of fiscal 2011 from $21.9 million for the third quarter of
fiscal 2010.
The increase in other operating expenses is primarily driven by the professional fees incurred as a
result of our strategic options process. We incurred $2.7 million in professional fees during the
third quarter of fiscal 2011 related to our strategic options process. These costs include legal,
consulting and board fees. We began our strategic options process in March of last year and
incurred $1.4 million of strategic options expenses during the third quarter of fiscal 2010. Our
strategic options costs will continue to be material and we may incur material costs related to
contingencies that are currently unknown. We also incurred a $0.4 million increase in medical
claims expense during the third quarter of fiscal 2011 compared to the same period of the prior
year due to an increase in claims filed by our employees and a $0.3 million increase in maintenance
expense as our facilities continue to age. These increases were offset by a decline in primary
care physician practice expenses at one of our hospital due to a reduction in the number of
physicians within the practice.
Depreciation expense. Depreciation expense decreased $1.7 million to $3.7 million for the third
quarter of fiscal 2011 from $5.4 million for the second quarter of fiscal 2010. The decrease in
depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due
to impairments on long-lived assets recorded before the third quarter of fiscal 2011.
Impairment expense. Impairment expense decreased $22.0 million to $0.8 million for the third
quarter of fiscal 2011 from $22.8 million for the third quarter of fiscal 2010. During the third
quarter of fiscal 2011, the Company recognized an impairment of certain assets maintained at
corporate due to indicators of value received during the Companys strategic options process.
During the third quarter of fiscal 2010, the Company recognized an impairment of property and
equipment at and certain assets maintained at corporate and one of its hospitals due to declines in
operating performance as well as the ongoing review of strategic alternatives for the Company.
Interest expense. Interest expense decreased $0.5 million to $0.6 million for the third quarter of
fiscal 2011 from $1.1 million for the third quarter of fiscal 2010. The decrease in interest
expense is principally due to the reduction in amounts outstanding under the Companys Senior
Secured Credit Facility, partially offset by an increase in the amount of assets under capital
leases.
Equity in net earnings of unconsolidated affiliates. The net earnings of unconsolidated affiliates
are comprised of our share of earnings in unconsolidated hospitals and a hospital realty
investment. The Company owned two unconsolidated hospitals until the disposition of its interest
in Avera Heart Hospital of South Dakota (AHHSD) on October 1, 2010.
Equity in net earnings of unconsolidated affiliates decreased during the third quarter of fiscal
2011 to $0.3 million from $1.4 million for the same period of fiscal 2010. AHHSD contributed $1.2
million of net earnings during the third quarter of fiscal 2010 and was disposed on October 1, 2010
resulting in the noted decrease in such equity in net earnings.
Income tax benefit. Income tax benefit was $(1.9) million for the third quarter of fiscal 2011
compared to $(8.8) million for the third quarter of fiscal 2010, which represents an effective tax
rate of (60.1%) and (40.0%) for the respective periods. The third quarter fiscal 2011 and 2010
effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income
allocable to our noncontrolling interests. The Company has recognized a disproportionate share of
losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and
committed capital of the Companys partners or members.
(Loss) income from discontinued operations, net of taxes. Income from discontinued operations, net
of taxes increased $12.5 million for the third quarter of fiscal 2011 from $2.7 million for the
comparable period of fiscal 2010. During the third quarter of fiscal 2011, the Company disposed of
its interest in MedCath Partners and CCH and recognized a pre-tax
gain on disposition of $25.9
million. In addition, the Company recognized an impairment of $5.2 million to property and
equipment at one of its discontinued hospitals during the third quarter of fiscal 2010. Such
impairment was partially offset by the operating activities of another of the Companys
discontinued hospitals.
Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of
consolidated subsidiaries decreased to $1.7 million for the third quarter of fiscal 2011 from $2.4
million for the comparable period of fiscal 2010.
We recognize a disproportionate share of losses for certain of our entities. The increase in net
income attributable to noncontrolling interest is the result of us absorbing more losses during the
current period compared to the prior year. We expect earnings attributable to noncontrolling
interests to fluctuate in future periods as we either recognize disproportionate losses and/or
recoveries thereof through disproportionate profit recognition. For a more complete discussion of
our accounting for noncontrolling interests, including
the basis for disproportionate allocation accounting, see Critical Accounting Policies for the
fiscal year ended September 30, 2010.
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Table of Contents
Results of Operations
Nine Months Ended June 30, 2011 Compared to Nine Months Ended June 30, 2010
Statement of Operations Data. The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
Nine Months Ended June 30, | ||||||||||||||||||||
(in thousands except percentages) | ||||||||||||||||||||
Increase/ | ||||||||||||||||||||
(Decrease) | % of Net Revenue | |||||||||||||||||||
2011 | 2010 | % | 2011 | 2010 | ||||||||||||||||
Net revenue |
$ | 273,617 | $ | 271,625 | 0.7 | % | 100.0 | % | 100.0 | % | ||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel expense |
96,490 | 93,950 | 2.7 | % | 35.3 | % | 34.6 | % | ||||||||||||
Medical supplies expense |
66,573 | 68,938 | (3.4 | )% | 24.3 | % | 25.4 | % | ||||||||||||
Bad debt expense |
30,483 | 28,196 | 8.1 | % | 11.1 | % | 10.4 | % | ||||||||||||
Other operating expenses |
69,476 | 64,005 | 8.5 | % | 25.5 | % | 23.6 | % | ||||||||||||
Pre-opening expenses |
| 866 | (100.0 | )% | | 0.3 | % | |||||||||||||
Depreciation |
12,092 | 15,773 | (23.3 | )% | 4.4 | % | 5.8 | % | ||||||||||||
Impairment of property and equipment |
20,358 | 37,513 | 100.0 | % | 7.4 | % | 13.8 | % | ||||||||||||
(Gain) loss on disposal of property, equipment
and other assets |
(141 | ) | 43 | (427.9 | )% | | | |||||||||||||
Loss from operations |
(21,714 | ) | (37,659 | ) | (42.3 | )% | (7.9 | )% | (13.9 | )% | ||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest expense |
(2,605 | ) | (3,046 | ) | (14.5 | )% | (1.0 | )% | (1.1 | )% | ||||||||||
Interest and other income |
615 | 141 | 336.2 | % | 0.2 | % | 0.1 | % | ||||||||||||
Loss on note receiveable |
| (1,507 | ) | 100.0 | % | | (0.6 | )% | ||||||||||||
Gain on sale of unconsolidated affiliates |
15,391 | | 100.0 | % | 5.6 | % | | |||||||||||||
Equity in net earnings of unconsolidated affiliates |
1,679 | 3,984 | (57.9 | )% | 0.6 | % | 1.5 | % | ||||||||||||
Loss from continuing operations before
income taxes |
(6,634 | ) | (38,087 | ) | (82.6 | )% | (2.5 | )% | (14.0 | )% | ||||||||||
Income tax benefit |
(5,370 | ) | (15,840 | ) | (66.1 | )% | (2.0 | )% | (5.8 | )% | ||||||||||
Loss from continuing operations |
(1,264 | ) | (22,247 | ) | (94.3 | )% | (0.5 | )% | (8.2 | )% | ||||||||||
Income from discontinued operations, net of taxes |
53,475 | 1,283 | 4068.0 | % | 19.5 | % | 0.5 | % | ||||||||||||
Net income (loss) |
52,211 | (20,964 | ) | (349.1 | )% | 19.1 | % | (7.7 | )% | |||||||||||
Less: Net income attributable to noncontrolling interest |
(16,336 | ) | (5,718 | ) | 185.7 | % | (5.9 | )% | (2.1 | )% | ||||||||||
Net income (loss) attributable to MedCath Corporation |
$ | 35,875 | $ | (26,682 | ) | (234.5 | )% | 13.1 | % | (9.8 | )% | |||||||||
Amounts attributable to MedCath Corporation common
stockholders: |
||||||||||||||||||||
Loss from continuing operations, net of taxes |
$ | (8,754 | ) | $ | (27,298 | ) | (67.9 | )% | (3.2 | )% | (10.0 | )% | ||||||||
Income from discontinued operations, net of taxes |
44,629 | 616 | 7145.0 | % | 16.3 | % | 0.3 | % | ||||||||||||
Net income (loss) |
$ | 35,875 | $ | (26,682 | ) | (234.5 | )% | 13.1 | % | (9.8 | )% | |||||||||
Nine Months Ended June 30, | ||||||||||||
2011 | 2010 | % Change | ||||||||||
Selected Operating Data (a): |
||||||||||||
Number of hospitals |
5 | 5 | ||||||||||
Licensed beds (b) |
421 | 421 | ||||||||||
Staffed and available beds (c) |
380 | 380 | ||||||||||
Admissions (d) |
14,115 | 14,244 | (0.9 | )% | ||||||||
Adjusted admissions (e) |
21,308 | 21,051 | 1.2 | % | ||||||||
Patient days (f) |
52,741 | 53,588 | (1.6 | )% | ||||||||
Adjusted patient days (g) |
80,088 | 79,461 | 0.8 | % | ||||||||
Average length of stay (days) (h) |
3.74 | 3.76 | (4.1 | )% | ||||||||
Occupancy (i) |
50.8 | % | 51.7 | % | ||||||||
Inpatients with a catheterization procedure (j) |
5,731 | 6,073 | (5.6 | )% | ||||||||
Inpatient surgical procedures (k) |
3,343 | 3,474 | (3.8 | )% | ||||||||
Hospital net revenue (in thousands except
percentages) |
$ | 273,379 | $ | 271,293 | 0.8 | % |
(a) | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing
operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in
our consolidated financial statements. |
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(b) | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether
the beds are actually available for patient use. |
|
(c) | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. |
|
(d) | Admissions represent the number of patients admitted for inpatient treatment. |
|
(e) | Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. |
|
(f) | Patient days represent the total number of days of care provided to inpatients. |
|
(g) | Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days
by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. |
|
(h) | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. |
|
(i) | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the
number of staffed and available beds. |
|
(j) | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals
catheterization labs during the period. |
|
(k) | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
Net Revenue. Our consolidated net revenue increased 0.7%, or $2.0 million, to $273.6 million for
the nine months ended June 30, 2011 from $271.6 million for the nine months ended June 30, 2010.
Inpatient net revenue was 68.7% of the net patient revenue for the first nine months of fiscal 2011
compared to 70.5% for the same period of the prior year. Our total inpatient cases were down 1.0%
and inpatient net revenue was down 2.6% for the first nine months of fiscal 2011 compared to the
first nine months of fiscal 2010. Outpatient net revenue increased 5.9% due to HMMC, our newest
hospital which began operations during the first quarter of fiscal 2010.
Net revenue for the first nine months of fiscal 2011 included charity care deductions of $6.2
million compared to charity care deductions of $5.2 million for the first nine months of fiscal
2010. The $1.0 million increase is the result of more uninsured patients applying and qualifying
for charity care.
Personnel expense. Our consolidated personnel expense increased 2.7%, or $2.5 million, to $96.5
million for the nine months ended June 30, 2011 from $94.0 million for the nine months ended June
30, 2010.
Personnel expense increased $0.9 million due to an increase in stock based compensation. As part
of the strategic options process and the impact that certain related events may have on
non-deductibility of executive compensation, the compensation committee of our Board of Directors
waived the performance vesting criteria for certain executive managements restricted stock shares
during the first quarter of fiscal 2011 to ensure the deductibility of the compensation expense for
federal corporate income tax purposes. The waiver caused all future stock based compensation
related to the shares that would have vested over time as performance criteria were met to be
recognized during the first quarter of fiscal 2011. The shares subject to the waiver of vesting
criteria continue to maintain sell restrictions that will be lifted upon a change in control of the
Company. In addition, management updated the estimate on the restricted share forfeiture rate
since it is anticipated that the rate of employee turnover will decline as we continue to progress
with our strategic options process. We also experienced a $1.1 million increase in expense related
to hospital employee healthcare claims attributable to an increase in the number of claims reported
during the period and a $0.4 million increase in workers compensation expense as a result of
transitioning to a first dollar coverage plan during fiscal 2011. These increases were offset by a
decline in bonus expense as a result of lower current year operations compared to bonus attainment
targets.
Medical supplies expense. Our consolidated medical supplies expense decreased 3.4%, or $2.3
million, to $66.6 million for the first nine months of fiscal 2011 from $68.9 million for the first
nine months of fiscal 2010.
The decline in medical supplies expense is primarily due to $3.5 million in sales tax refunds and
reductions at two of our hospitals. Absent the refunds, medical supplies expense increased $1.2
million year over year due to an increase in utilization of high dollar devices at certain of our
hospitals during the first six months of fiscal 2011 compared to the same period of the prior year.
Bad debt expense. Our consolidated bad debt expense increased 8.1% to $30.5 million for the first
nine months of fiscal 2011 from $28.2 million for the first nine months of fiscal 2010. As a
percentage of net revenue, bad debt expense increased to 11.1% for the first nine months of fiscal
2011 as compared to 10.4% for the comparable period of fiscal 2010. This increase is attributable
to a $7.1 million increase in self-pay revenue for the first nine months of fiscal 2011 compared to
the same period of the prior year offset by improved collection on accounts receivable during
fiscal 2011. Our days sales outstanding for the first nine months of fiscal 2011 and fiscal 2010
were 44.
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Other operating expenses. Our consolidated other operating expenses increased 8.5%, or $5.5
million, to $69.5 million for the first nine months of fiscal 2011 from $64.0 million for the first
nine months of fiscal 2010.
Our legal and professional fees were $5.5 million higher for the first nine months of fiscal 2011
compared to the first nine months of fiscal 2010 directly related to the fees incurred related to
our strategic options process. These costs include legal, consulting and board related fees. Our
strategic options costs will continue to be material and we may incur material costs related to
contingencies that are currently unknown.
Depreciation expense. Depreciation expense decreased $3.7 million to $12.1 million for the first
nine months of fiscal 2011 from $15.8 million for the first nine months of fiscal 2010. The
decrease in depreciation expense is primarily attributable to the decrease in fixed asset
depreciable base due to impairments on long-lived assets recorded before the third quarter of
fiscal 2011.
Impairment expense. Impairment expense decreased $17.1 million to $20.4 million for the first nine
months of fiscal 2011 from $37.5 million for the first nine months of fiscal 2010. During the
first nine months of fiscal 2011, the Company recognized an impairment of property and equipment at
corporate and at two of its hospitals due to declines in operating performance as well as the
uncertainty at those hospitals as a result of the Companys strategic options process. During the
first nine months of fiscal 2010, the Company recognized an impairment of property and equipment at
one of its hospitals due to declines in operating performance as well as the ongoing review of
strategic alternatives for the Company.
Interest expense. Interest expense decreased $0.4 million or 14.5% to $2.6 million for the first
nine months of fiscal 2011 from $3.0 million for the first nine months of fiscal 2010. The decrease
in interest expense is primarily attributable to the overall reduction in our outstanding debt,
partially offset by a slight increase in the rate charged on outstanding debt and an increase in
the amount of assets under capital leases. The Company expects continued decreases in interest
expense due to the repayment of amounts outstanding under, and the termination of, the Amended
Credit Facility during May 2011.
Loss on note receivable. Our corporate and other division entered into a note receivable agreement
with a third party during 2008. Certain minority membership interest of one of our hospitals was
pledged as collateral to secure the note receivable on behalf of the third party. An impairment of
the long-lived assets of the hospital in which the minority membership interest was pledged as
collateral for the note receivable was recorded during the second quarter of fiscal 2010 due to
sustained losses and insufficient forecasted cash flow. The note receivable was deemed
uncollectable and a loss of $1.5 million was recorded in the first nine months of fiscal 2010 due
to our determination of the third partys inability to service the note and the insufficiency of
the value of the collateral securing the note.
Gain on sale of equity interests. The gain on sale of equity interests of $15.4 million for the
first nine months of fiscal 2011 is related to the sale of our interest in AHHSD on October 1,
2010.
Equity in net earnings of unconsolidated affiliates. The net earnings of unconsolidated affiliates
are comprised of our share of earnings in unconsolidated hospitals and a hospital realty
investment. The Company owned two unconsolidated hospitals until the disposition of its interest in
AHHSD on October 1, 2010.
Equity in net earnings of unconsolidated affiliates decreased during the first nine months of
fiscal 2011 to $1.7 million from $4.0 million for the same period of fiscal 2010. AHHSD
contributed $3.2 million of net earnings during the first nine months of fiscal 2010 and was
disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings.
Income tax benefit. Income tax benefit was $(5.4) million for the first nine months of fiscal 2011
compared to $(15.8) million for the first nine months of fiscal 2010, which represents an effective
tax rate of (80.9%) and (41.6%) for the respective periods. The first nine months of fiscal 2011
and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of
income allocable to our noncontrolling interests. The Company has recognized a disproportionate
share of losses at certain of our hospitals due to cumulative losses in excess of initial
capitalization and committed capital of the Companys partners or members.
Income (loss) from discontinued operations, net of taxes. Income (loss) from discontinued
operations, net of taxes increased to an income of $53.5 million for the first nine months of
fiscal 2011 from $1.3 million for the comparable period of fiscal 2010. During the first nine
months of fiscal 2011, the Company recognized pre-tax gains upon disposition of assets of
discontinued operations of $95.9 million, partially offset by an $11.1 million loss on early
termination of debt at one of the facilities. The significant components of the gains recognized
are a $25.9 million gain, a $35.7 million gain and a $34.3 million gain on the sale of the assets
of Partners/CCH, HHA and TexSan Heart Hospital, respectively. During the first nine months of
fiscal 2010, the Company recognized an impairment of $5.2 million to property and equipment at one
of its discontinued hospitals due to declines in operating performance as well as the receipt of an
independent third party market offer that indicated that impairment existed. Such impairment was
partially offset by the operating activities of another of the Companys discontinued hospitals.
During the first nine months of fiscal 2011, the Company has had nominal operating activities
related to its discontinued operations.
Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of
consolidated subsidiaries increased to $16.4 million for the first nine months of fiscal 2011 from
$5.7 million for the comparable period of fiscal 2010.
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Net
income attributable to noncontrolling interest increased $6.9 million and $2.2 million due to
the noncontrolling shareholders interest in the gains recognized in fiscal 2011 upon the
disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In
addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH
in the first nine months of fiscal 2010 and the Companys sale of its interest in AzHH on October
1, 2010.
We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we
either recognize disproportionate losses and/or recoveries thereof through disproportionate profit
recognition. For a more complete discussion of our accounting for noncontrolling interests,
including the basis for disproportionate allocation accounting, see Critical Accounting Policies
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
Liquidity and Capital Resources
Cash provided by continuing operations from operating activities was $3.6 million for the first
nine months of fiscal 2011 compared to cash provided by continuing operations operating activities
of $15.9 million for the comparable period of fiscal 2010. The decrease of $12.3 million in cash
provided by continuing operations from operating activities was due
to a $12.5 million decrease in
cash from operating activities, an increase in payments of $8.3 million related to the timing of
payments associated with accounts payable and a decrease in accounts receivable collections of $0.4
million. These increases in cash payments were partially offset by a $1.7 million reduction in
cash payments associated with the purchases of and cost of medical
supplies and a $6.5 million
decrease in payments related to the timing of prepaid obligations, such as yearly insurance
premiums.
Our investing activities from continuing operations provided net cash of $21.1 million for the
first nine months of fiscal 2011 compared to a use of cash of $15.2 million for the comparable
period of fiscal 2010. Such increase was primarily due to the net proceeds of $24.9 million for
the disposition of the Companys interest in AHHSD during the first nine months of fiscal 2011. In
addition, the Company experienced a decrease of $13.0 million in cash paid for property and
equipment in the first nine months of fiscal 2011 compared to the same period in fiscal 2010. This
decrease is primarily related to the capital expenditures in fiscal 2010 related to the development
of HMMC, which opened in October 2009. In addition, the Company used cash of $1.8 million to
pledge as collateral for certain letters of credit that had not been required to be collateralized
due to the Companys repayment of its Amended Credit Facility during the third quarter of fiscal
2011.
Our financing activities from continuing operations used net cash of $78.3 million for the first
nine months of fiscal 2011 compared to $21.2 million for the comparable period of fiscal 2010. The
increase was due to the repayment of outstanding amounts and termination of our Amended Credit
Facility during the first nine months of fiscal 2011, including repayment of all outstanding
amounts in May 2011.
Capital Expenditures. Cash paid for property and equipment was $2.3 million and $15.3 million for
the first nine months of fiscal years 2011 and 2010, respectively. Of the $15.3 million of cash
paid for property and equipment during the first nine months of fiscal 2010, $7.5 million related
to HMMC, which opened in October 2009.
Obligations and Availability of Financing. At June 30, 2011, we had $6.6 million of obligations
under capital leases (which is due to various lenders to our hospitals), of which $2.3 million was
classified as current. At June 30, 2011, we guaranteed either all or a portion of the obligations
of certain of our subsidiary hospitals for equipment and other notes payable. We provide these
guarantees in accordance with the related hospital operating agreements, and we receive a fee for
providing these guarantees from either the hospitals or the physician investors.
We believe that cash on hand, internally generated cash flows from operations and net proceeds from
asset sales will be sufficient to finance our strategic plans, capital expenditures and our working
capital requirements for the next 12 to 18 months.
We
anticipate distributing approximately $6.75 per common share during
the fourth quarter of fiscal 2011 to stockholders as of the record
date for such distribution. The
distribution will only occur if we obtain shareholder approval of
the proposals outlined in a preliminary proxy statement filed on
August 5, 2011, and no currently unknown or unanticipated
material liabilities of the Company arise. The distribution will be
made using cash on hand and the proceeds from the sale of Heart
Hospital of New Mexico and Arkansas Heart Hospital (see note 16).
Intercompany Financing Arrangements. We provide secured real estate, equipment and working capital
financings to our majority-owned hospitals. Each intercompany real estate loan is separately
documented and secured with a lien on the borrowing hospitals real estate, building and equipment
and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and
accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar
to terms commercially available.
Each intercompany equipment loan is separately documented and secured with a lien on the borrowing
hospitals equipment and certain other assets. Amounts borrowed under the intercompany equipment
loans are payable in monthly installments of principal and interest over terms that range from 5 to
7 years. The intercompany equipment loans accrue interest at rates ranging from 5.8% to 8.43%. The
weighted average interest rate for the intercompany equipment loans at June 30, 2011 was 7.31%.
We typically receive a fee from the minority partners in the subsidiary hospitals as further
consideration for providing these intercompany real estate and equipment loans.
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We also use intercompany financing arrangements to provide cash support to individual hospitals for
their working capital and other corporate needs. We provide these working capital loans pursuant to
the terms of the operating agreements between our physician and hospital investor partners and us
at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish
borrowing limits and provide for a market rate of interest to be paid to us on outstanding
balances. These intercompany loans are subordinate to each hospitals mortgage and equipment debt
outstanding, but are senior to our equity interests and our partners equity interests in the
hospital venture and are secured, subject to the prior rights of the senior lenders, in each
instance by a pledge of certain of the borrowing hospitals assets. Also as part of our
intercompany financing and cash management structure, we sweep cash from individual hospitals as
amounts are available in excess of the individual hospitals working capital needs. These funds are
advanced pursuant to cash management agreements with the individual hospital that establish the
terms of the advances and provide for a rate of interest to be paid consistent with the market rate
earned by us on the investment of its funds. These cash advances are due back to the individual
hospital on demand and are subordinate to our equity investment in the hospital venture.
The estimated net realizable value of intercompany notes outstanding with the Companys
subsidiaries in continuing operations was $116.5 million as of June 30, 2011.
The net realizable value of our intercompany notes outstanding includes a reserve for the amount of
the impairment charges we have recorded for facilities that have an intercompany amount outstanding
that exceeds the carrying value of the related assets that serve as collateral on the notes.
Therefore, our total net realizable value of our intercompany note outstanding has been reduced by
$82.6 million, the total amount of impairment charge recorded for assets in continuing operations.
The estimated net realizable value of intercompany notes related to continuing operations at June
30, 2011 is outlined below:
Estimated Net Realizable Value of Intercompany Notes Related to Continuing
Operations at June 30, 2011
Operations at June 30, 2011
(in millions) | ||||
Heart Hospital of New Mexico and Arkansas Heart Hospital(1) |
$ | 40,377 | ||
Bakersfield Heart Hospital |
31,678 | |||
Hualapai Mountain Medical Center(2) |
22,107 | |||
Louisiana Medical Center and Heart Hospital(2) |
22,348 | |||
Continuing Operations |
$ | 116,509 | ||
(1) | Heart Hospital of New Mexico and Arkansas Heart Hospital were included in continuing
operations at June 30, 2011, but will be classified as discontinued operations for the
Companys fourth quarter ending September 30, 2011. See
Note 16. |
|
(2) | The net realizable value of these intercompany notes is directly related to the fair value
(and carrying value) of the property, plant and equipment of these entities which serve as
collateral for the notes. The carrying value of the property, plant and equipment is net of
impairment charges that were incurred related to these assets. |
Retained Obligations Subsequent to Disposition. Included in discontinued operations are certain
liabilities that the Company has retained upon the disposition of the related entity. As the
Companys hospitals are organized as partnerships, upon disposition of the related operations,
assets and certain liabilities, the partnerships are responsible for the resolution of outstanding
payables, remaining obligations, including those related to cost reports, medical malpractice and
other obligations and wind down of the respective tax filings of the partnership. The partnerships
are also responsible for any unknown liabilities that may arise. The Company has reported all
known obligations in its consolidated balance sheets as of June 30, 2011 and September 30, 2010.
However, as the ultimate resolution of the outstanding payables and obligations may take in excess
of one year, our estimates may prove incorrect and result in the Company paying amounts in excess
of those recorded at the respective balance sheet date.
Retained Cash Balance. At June 30, 2011, the Company had $113.7 million in cash related to
continuing operations and $43.2 million in cash related to discontinued operations. As of June 30,
2011, the Companys estimate of total potential cash distributions to the Company from discontinued
operations is $27.0 to $28.0 million after taking into account distributions to minority owners,
the liquidation of all assets and the settlement of all known liabilities, but does not take into
account any unknown contingent liabilities related to the discontinued operations such as those
that may arise as a result of the pending ICD investigation. The estimate of total cash
distributions to the Company may change as it updates its estimates. There can be no assurance
when the distributions to the Company from discontinued operations may take place, but it may be
over an extended period of time.
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Disclosure About Critical Accounting Policies
Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2010, as amended. During the first nine months of fiscal 2011 we adopted a new
accounting policy as discussed in Note 2 Recent Accounting Pronouncements to our consolidated
financial statements. The adoption of this new accounting policy did not have a material impact on
our consolidated financial statements.
Forward-Looking Statements
Some of the statements and matters discussed in this report and in exhibits to this report
constitute forward-looking statements, including those relating to estimated distributions to the
Company, resolution of outstanding payables and obligations and others. Words such as expects,
anticipates, approximates, believes, estimates, intends and hopes and variations of
such words and similar expressions are intended to identify such forward-looking statements. We
have based these statements on our current expectations and projections about future events. These
forward-looking statements are not guarantees of future performance and are subject to risks and
uncertainties that could cause actual results to differ materially from those projected in these
statements. Although we believe that these statements are based upon reasonable assumptions, we
cannot assure you that we will achieve our goals. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this report and its exhibits might not occur.
Our forward-looking statements speak only as of the date of this report or the date they were
otherwise made. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. We urge you to
review carefully all of the information in this report and our other filings with the SEC,
including the discussion of risk factors in Item 1A. Risk Factors in this report and our Annual
Report on Form 10-K for the year ended September 30, 2010, as amended, before making an investment
decision with respect to our equity securities. A copy of this report, including exhibits, is
available on the internet site of the SEC at http://www.sec.gov or through our website at
http://www.medcath.com.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We maintain a policy for managing risk related to exposure to variability in interest rates,
commodity prices, and other relevant market rates and prices which includes considering entering
into derivative instruments (freestanding derivatives), or contracts or instruments containing
features or terms that behave in a manner similar to derivative instruments (embedded derivatives)
in order to mitigate our risks. In addition, we may be required to hedge some or all of our market
risk exposure, especially to interest rates, by creditors who provide debt funding to us. The
Company disposed of its minority interest in a hospital that maintained a cash flow hedge on
October 1, 2010. As a result, the Company does not have outstanding any derivatives at June 30,
2011. There was no material change in our policy for managing risk related to variability in
interest rates, commodity prices, other relevant market rates and prices during the first nine
months of fiscal 2011. See Item 7A in the Companys Annual Report on Form 10-K for the fiscal year
ended September 30, 2010, as amended, for further discussions about market risk.
Interest Rate Risk
Until the repayment of our Amended Credit Facility in May 2011, borrowings exposed us to risks
caused by fluctuations in the underlying interest rates. Subsequent to such date, the Company is no
longer exposed to fluctuations in interest rates.
Item 4. | Controls and Procedures |
The President and Chief Executive Officer and the Executive Vice President and Chief Financial
Officer of the Company (its principal executive officer and principal financial officer,
respectively) have concluded, based on their evaluation of the Companys disclosure controls and
procedures as of June 30, 2011, that the Companys disclosure controls and procedures were
effective as of June 30, 2011 to ensure that information required to be disclosed by the Company in
the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized and reported in a timely manner, and includes
controls and procedures designed to ensure that information required to be disclosed by the Company
in the reports that it files under the Exchange Act is accumulated and communicated to the
Companys management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. There were no changes during
the fiscal quarter to the Companys internal controls over financial reporting that materially
affected or is reasonably likely to materially affect, the Companys internal controls over
financial reporting.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
We are occasionally involved in legal proceedings and other claims arising out of our
operations in the normal course of business. See Note 7 Contingencies and Commitments to the
consolidated financial statements included in this report.
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Item 1A. | Risk Factors |
Information concerning certain risks and uncertainties appears under the heading Forward-Looking
Statements in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K
for the year ended September 30, 2010, as amended. You should carefully consider these risks and
uncertainties before making an investment decision with respect to our securities. Such risks and
uncertainties could materially adversely affect our business, financial condition or operating
results.
During the period covered by this report, there have been no material changes from the risk factors
previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2010, as
amended, filings subsequently made with the Securities and Exchange
Commission, or the preliminary proxy submitted to the Securities and Exchange Commission on August 5, 2011.
Item 6. | Exhibits |
Exhibit No. | Description | |||
2.1 | Equity Purchase Agreement dated as of May 6, 2011 by and among AR-Med, LLC, Little Rock Cardiology
Clinic, P.A., MedCath of Little Rock, L.L.C., MedCath of Arkansas, LLC and MedCath Finance Company,
LLC (1) |
|||
2.2 | Asset Purchase Agreement dated as of May 6, 2011 by and between Lovelace Health System, Inc. and
Heart Hospital of New Mexico, LLC (1) |
|||
3.1 | Certificate of Designation of Series A Junior Participating Preferred Stock, filed with the Secretary
of State of the State of Delaware on June 15, 2011 (2) |
|||
4.1 | Section 382 Rights Plan, dated as of June 15, 2011, between MedCath Corporation and American Stock
Transfer & Trust Company, LLC, as Rights Agent, together with the following exhibits thereto: Exhibit
A Form of Certificate of Designation of Series A Junior Participating Preferred Stock of MedCath
Corporation; Exhibit B Form of Right Certificate; Exhibit C Summary of Rights to Purchase
Shares of Preferred Stock of MedCath Corporation (2) |
|||
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference from the Companys Current Report on Form 8-K filed May 12, 2011. |
|
(2) | Incorporated by reference from the Companys Current Report on Form 8-K filed June 16, 2011. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MEDCATH CORPORATION |
||||
Dated: August 9, 2011 | By: | /s/ O. EDWIN FRENCH | ||
O. Edwin French | ||||
President and Chief Executive Officer (principal executive officer) |
||||
By: | /s/ JAMES A. PARKER | |||
James A. Parker | ||||
Executive Vice President and Chief Financial Officer (principal financial officer) |
||||
By: | /s/ LORA RAMSEY | |||
Lora Ramsey | ||||
Vice President and Controller (principal accounting officer) |
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Table of Contents
INDEX TO EXHIBITS
Exhibit No. | Description | |||
2.1 | Equity Purchase Agreement dated as of May 6, 2011 by and among AR-Med, LLC, Little Rock Cardiology
Clinic, P.A., MedCath of Little Rock, L.L.C., MedCath of Arkansas, LLC and MedCath Finance Company,
LLC (1) |
|||
2.2 | Asset Purchase Agreement dated as of May 6, 2011 by and between Lovelace Health System, Inc. and
Heart Hospital of New Mexico, LLC (1) |
|||
3.1 | Certificate of Designation of Series A Junior Participating Preferred Stock, filed with the Secretary
of State of the State of Delaware on June 15, 2011 (2) |
|||
4.1 | Section 382 Rights Plan, dated as of June 15, 2011, between MedCath Corporation and American Stock
Transfer & Trust Company, LLC, as Rights Agent, together with the following exhibits thereto: Exhibit
A Form of Certificate of Designation of Series A Junior Participating Preferred Stock of MedCath
Corporation; Exhibit B Form of Right Certificate; Exhibit C Summary of Rights to Purchase
Shares of Preferred Stock of MedCath Corporation (2) |
|||
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(1) | Incorporated by reference from the Companys Current Report on Form 8-K filed May 12, 2011. |
|
(2) | Incorporated by reference from the Companys Current Report on Form 8-K filed June 16, 2011. |
38