UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
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For the quarterly period ended March 31, 2008
Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 000-33009
MEDCATH CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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56-2248952
(IRS Employer Identification No.)
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10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(704) 708-6600
(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 is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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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
April 30, 2008, there were 19,496,783 shares of $0.01 par value common stock outstanding.
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
MEDCATH CORPORATION
CONSOLIDATED BALANCE
SHEETS
(In thousands, except per share data)
(Unaudited)
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March 31,
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September 30,
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2008
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2007
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Current assets:
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Cash and cash equivalents
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$
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85,256
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$
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140,276
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Restricted cash
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8,500
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Accounts receivable, net
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99,529
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85,943
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Medical supplies
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15,583
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13,928
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Deferred income tax assets
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13,560
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12,389
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Prepaid expenses and other current assets
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5,663
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6,197
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Current assets of discontinued operations
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3,273
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13,680
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Total current assets
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231,364
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272,413
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Property and equipment, net
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281,365
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270,663
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Investments in affiliates
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4,850
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5,718
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Goodwill
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62,740
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62,740
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Other intangible assets, net
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6,187
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6,448
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Other assets
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6,420
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6,531
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Long-term assets of discontinued operations
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26,544
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44,902
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Total assets
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$
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619,470
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$
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669,415
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Current liabilities:
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Accounts payable
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$
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34,754
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$
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30,933
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Income tax payable
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1,492
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10,552
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Accrued compensation and benefits
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17,094
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18,567
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Other accrued liabilities
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12,065
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13,421
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Current portion of long-term debt and obligations
under capital leases
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4,504
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4,089
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Current liabilities of discontinued operations
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6,090
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15,810
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Total current liabilities
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75,999
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93,372
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Long-term debt
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144,394
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146,398
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Obligations under capital leases
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1,514
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1,793
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Deferred income tax liabilities
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11,855
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12,018
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Other long-term obligations
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415
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460
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Long-term liabilities of discontinued operations
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853
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13
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Total liabilities
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235,030
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254,054
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Commitments and contingencies
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Minority interest in equity of consolidated subsidiaries
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27,752
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29,737
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Stockholders equity:
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Preferred stock, $0.01 par value, 10,000,000 shares authorized;
none issued
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Common stock, $0.01 par value, 50,000,000 shares authorized;
21,451,144 issued and 19,496,783 outstanding at March 31, 2008
21,271,144 issued and 21,202,244 outstanding at September 30,2007
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215
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213
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Paid-in capital
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454,956
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447,688
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Accumulated deficit
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(53,379
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)
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(61,821
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)
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Accumulated other comprehensive loss
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(307
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)
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(62
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)
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Treasury stock, at cost;
68,900 shares at September 30, 2007
1,954,361 shares at March 31, 2008
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(44,797
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)
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(394
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)
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Total stockholders equity
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356,688
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385,624
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Total liabilities and stockholders equity
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$
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619,470
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$
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669,415
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See notes to unaudited consolidated financial statements.
1
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended March 31,
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Six Months Ended March 31,
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2008
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2007
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2008
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2007
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Net revenue
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$
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157,098
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$
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176,640
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$
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305,948
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$
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337,026
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Operating expenses:
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Personnel expense
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49,638
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55,977
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100,503
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107,918
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Medical supplies expense
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43,097
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47,099
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82,726
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91,254
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Bad debt expense
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10,332
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14,635
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21,617
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27,762
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Other operating expenses
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30,419
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34,257
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59,565
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67,358
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Pre-opening expenses
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245
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493
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Depreciation
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7,709
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8,180
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15,074
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16,450
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Amortization
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135
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127
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262
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379
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Loss on disposal of property, equipment
and other assets
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|
138
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|
796
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|
166
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|
853
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|
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|
|
|
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Total operating expenses
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141,713
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161,071
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280,406
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311,974
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Income from operations
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15,385
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15,569
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25,542
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25,052
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Other income (expenses):
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Interest expense
|
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(3,864
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)
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(5,693
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)
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(7,796
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)
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(13,028
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)
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Loss on early extinguishment of debt
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(662
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)
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(5,142
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)
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Interest and other income, net
|
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488
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1,805
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1,657
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4,525
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Equity in net earnings of unconsolidated affiliates
|
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2,181
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1,482
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4,206
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2,920
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|
|
|
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Total other expenses, net
|
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(1,195
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)
|
|
|
(3,068
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)
|
|
|
(1,933
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)
|
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(10,725
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)
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Income from continuing operations before minority
interest and incomes taxes
|
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14,190
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|
|
12,501
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23,609
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|
|
14,327
|
|
Minority interest share of earnings of consolidated
subsidiaries
|
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|
(5,114
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)
|
|
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(3,268
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)
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|
|
(9,566
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)
|
|
|
(5,474
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)
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|
|
|
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|
|
|
|
|
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Income from continuing operations before income taxes
|
|
|
9,076
|
|
|
|
9,233
|
|
|
|
14,043
|
|
|
|
8,853
|
|
Income tax expense
|
|
|
3,099
|
|
|
|
4,504
|
|
|
|
5,448
|
|
|
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
5,977
|
|
|
|
4,729
|
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|
$
|
8,595
|
|
|
$
|
4,367
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Income (loss) from discontinued operations, net of taxes
|
|
|
(292
|
)
|
|
|
1,521
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|
|
|
154
|
|
|
|
(3,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
|
|
$
|
5,685
|
|
|
$
|
6,250
|
|
|
$
|
8,749
|
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.30
|
|
|
$
|
0.23
|
|
|
$
|
0.42
|
|
|
$
|
0.21
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic
|
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.43
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.30
|
|
|
$
|
0.22
|
|
|
$
|
0.41
|
|
|
$
|
0.20
|
|
Discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.07
|
|
|
|
0.01
|
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,841
|
|
|
|
21,019
|
|
|
|
20,438
|
|
|
|
20,568
|
|
Dilutive effect of stock options and restricted stock
|
|
|
121
|
|
|
|
625
|
|
|
|
202
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,962
|
|
|
|
21,644
|
|
|
|
20,640
|
|
|
|
21,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
2
MEDCATH CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury Stock
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
Balance, September 30, 2007
|
|
|
21,271
|
|
|
$
|
213
|
|
|
$
|
447,688
|
|
|
$
|
(61,821
|
)
|
|
$
|
(62
|
)
|
|
|
69
|
|
|
$
|
(394
|
)
|
|
$
|
385,624
|
|
Cumulative impact of change in accounting principle (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307
|
)
|
Exercise of
stock options, including income tax benefit
|
|
|
180
|
|
|
|
2
|
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,595
|
|
Share buyback
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885
|
|
|
|
(44,403
|
)
|
|
|
(44,403
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,922
|
|
Tax impact of cancellation of stock options
|
|
|
|
|
|
|
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(247
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,749
|
|
Change in fair value of interest rate
swaps, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008
|
|
|
21,451
|
|
|
$
|
215
|
|
|
$
|
454,956
|
|
|
$
|
(53,379
|
)
|
|
$
|
(307
|
)
|
|
|
1,954
|
|
|
$
|
(44,797
|
)
|
|
$
|
356,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
3
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
8,749
|
|
|
$
|
1,354
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations, net of taxes
|
|
|
(154
|
)
|
|
|
3,013
|
|
Bad debt expense
|
|
|
21,617
|
|
|
|
27,762
|
|
Depreciation
|
|
|
15,074
|
|
|
|
16,450
|
|
Amortization
|
|
|
262
|
|
|
|
379
|
|
Excess income tax benefit on exercised stock options
|
|
|
(366
|
)
|
|
|
(1,661
|
)
|
Loss on disposal of property, equipment and other assets
|
|
|
166
|
|
|
|
853
|
|
Share-based compensation expense
|
|
|
3,922
|
|
|
|
3,149
|
|
Amortization of loan acquisition costs
|
|
|
439
|
|
|
|
2,121
|
|
Equity in earnings of unconsolidated affiliates, net of dividends received
|
|
|
1,274
|
|
|
|
478
|
|
Minority interest share of earnings of consolidated subsidiaries
|
|
|
9,566
|
|
|
|
5,474
|
|
Deferred income taxes
|
|
|
(1,333
|
)
|
|
|
2,309
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(35,203
|
)
|
|
|
(34,341
|
)
|
Medical supplies
|
|
|
(1,655
|
)
|
|
|
654
|
|
Prepaids and other assets
|
|
|
206
|
|
|
|
(883
|
)
|
Accounts payable and accrued liabilities
|
|
|
(6,835
|
)
|
|
|
(2,704
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations
|
|
|
15,729
|
|
|
|
24,407
|
|
Net cash provided by (used in) operating activities of discontinued operations
|
|
|
3,859
|
|
|
|
(2,061
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
19,588
|
|
|
|
22,346
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(27,047
|
)
|
|
|
(9,832
|
)
|
Proceeds from sale of property and equipment
|
|
|
83
|
|
|
|
671
|
|
Cash restricted for investment
|
|
|
(8,500
|
)
|
|
|
|
|
Proceeds from sale of equity investment
|
|
|
624
|
|
|
|
|
|
Investments in affiliates
|
|
|
(1,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(35,870
|
)
|
|
|
(9,161
|
)
|
Net cash provided by investing activities of discontinued operations
|
|
|
23,757
|
|
|
|
130
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,113
|
)
|
|
|
(9,031
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(1,423
|
)
|
|
|
(111,606
|
)
|
Repayments of obligations under capital leases
|
|
|
(703
|
)
|
|
|
(914
|
)
|
Distributions to minority partners
|
|
|
(12,658
|
)
|
|
|
(9,628
|
)
|
Repayments from (advances to) minority partners, net
|
|
|
1,143
|
|
|
|
154
|
|
Proceeds from exercised stock options
|
|
|
3,227
|
|
|
|
4,594
|
|
Purchase of treasury shares
|
|
|
(44,403
|
)
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
39,658
|
|
Excess income tax benefit on exercised stock options
|
|
|
366
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(54,451
|
)
|
|
|
(76,081
|
)
|
Net cash used in financing activities of discontinued operations
|
|
|
(8,044
|
)
|
|
|
(1,703
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(62,495
|
)
|
|
|
(77,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(55,020
|
)
|
|
|
(64,469
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
140,276
|
|
|
|
193,505
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
85,256
|
|
|
$
|
129,036
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
4
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share
data)
1. Business and Organization
MedCath Corporation (the Company) primarily focuses on providing high acuity services,
predominantly the diagnosis and treatment of cardiovascular disease. The Company owns and operates
hospitals in partnership with physicians, most of whom are cardiologists and cardiovascular
surgeons. While each of the Companys majority-owned hospitals (collectively, the hospital
division) is licensed as a general acute care hospital, the Company focuses on serving the unique
needs of patients suffering from cardiovascular disease. As of March 31, 2008, the Company owned
and operated nine hospitals, together with its physician partners, who own an equity interest in
the hospitals where they practice. The Companys existing hospitals had a total of 616 licensed
beds, of which 596 were staffed and available, and were located in seven states: Arizona, Arkansas,
California, Louisiana, New Mexico, South Dakota, and Texas. The Company is currently in the process
of developing a new hospital located in Kingman, Arizona which it expects to open in late 2009 or
early 2010.
See Note 3
Discontinued Operations
for details concerning the Companys sale of its
equity interest in Heart Hospital of Lafayette and the Companys pending disposition of Dayton
Heart Hospital. Unless specifically indicated otherwise, all amounts and percentages presented in
these notes are exclusive of the Companys discontinued operations.
The Company accounts for all but two of its owned and operated hospitals as consolidated
subsidiaries. The Company owns a minority interest in Avera Heart Hospital of South Dakota and
Harlingen Medical Center as of March 31, 2008 and is not the primary beneficiary under the revised
version of Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51
(FIN No. 46-R). Therefore, the Company
is unable to consolidate these hospitals results of operations and financial position, but rather
is required to account for its minority ownership interest in these hospitals as an equity
investment. Harlingen Medical Center was a consolidated entity for the fiscal year ended September
30, 2006 and for the first three quarters of fiscal 2007. In July 2007, the Company sold a portion
of its equity interest in Harlingen Medical Center; therefore, the Company no longer is its
primary beneficiary and accounts for its minority ownership interest in the hospital as an equity
investment.
In addition to its hospitals, the Company provides cardiovascular care services in
diagnostic and therapeutic facilities in various locations and through mobile cardiac
catheterization laboratories (the MedCath Partners division). The Company also provides
consulting and management services tailored primarily to cardiologists and cardiovascular
surgeons, which is included in the corporate and other division.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Companys unaudited interim consolidated financial statements as
of March 31, 2008 and for the three and six months ended March 31, 2008 and 2007 have been prepared
in accordance with accounting principles generally accepted in the United States of America
(hereafter, generally accepted accounting principles) and pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC). These unaudited interim consolidated financial
statements reflect, in the opinion of management, all material adjustments 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 disclosure is adequate to make the information presented not
misleading. The unaudited interim consolidated financial statements and notes thereto should be
read in conjunction with the Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2007.
During the six months ended March 31, 2008, the Company has not made any material changes in the
selection or application of its critical accounting policies as set forth in its Annual Report on
Form 10-K for the fiscal year ended September 30, 2007, with the exception of the adoption of
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48) which clarifies the
accounting for uncertainty in tax positions. This interpretation requires that the Company
recognize the impact of a tax position in its consolidated financial statements if that position
is more likely than not of being sustained on audit, based on the technical merits of the
position.
Restatements and Reclassifications
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No.
144), hospitals sold or classified as held for sale are required to be reported as discontinued
operations. During fiscal 2006, the Company decided to seek to dispose of its interest in Heart
Hospital of Lafayette, therefore classifying the hospital as held for sale. During the first
quarter of fiscal 2008, the Company completed the disposition of Heart Hospital of Lafayette to a
third party. In March 2008, the Company, its physician partners and Good Samaritan Hospital
entered into a definitive agreement pursuant to which Good Samaritan Hospital will acquire
substantially all of Dayton Heart Hospitals assets. In accordance with the provisions of SFAS
No. 144, the results of operations of these hospitals for the three and six months ended March 31,
2008 and 2007 are reported as discontinued operations.
5
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The Company evaluated the carrying value of the long lived assets related to Heart Hospital
of Lafayette at December 31, 2006 and March 31, 2007. At December 31, 2006, it was determined that
the carrying value was in excess of the fair value. Accordingly, an impairment charge of $4.1
million was recorded in accordance with SFAS No. 144 during the first quarter of fiscal 2007 and
is included in loss from discontinued operations in the consolidated statement of operations for
the six months ended March 31, 2007. As of March 31, 2007, it was determined that the carrying
value approximated fair value and no further impairment was necessary.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities, revenues and expenses and related disclosures of
contingent assets and liabilities in the consolidated financial statements and accompanying
notes. There is a reasonable possibility that actual results may vary significantly from those
estimates.
Share-Based Compensation
On October 1, 2005, the Company adopted SFAS No. 123-R (revised
2004),
Share-Based Payment
(SFAS No. 123-R), which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and directors based on
estimated fair values
.
SFAS No. 123-R requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model and to expense the value of the
portion of the award that is ultimately expected to vest over the requisite service period in the
Companys statement of operations. On September 30, 2005, the compensation committee of the board
of directors approved a plan to accelerate the vesting of substantially all unvested stock options
previously awarded to employees with the condition that the optionee enter into a sale restriction
agreement which provides that if the optionee exercises a stock option prior to its originally
scheduled vesting date while employed by the Company, the optionee will be prohibited from selling
the share of stock acquired upon exercise of the option until the date the option would have
become vested had it not been accelerated. All new stock options granted since September 30, 2005
have immediate vesting with sales restrictions. As a result, share-based compensation is recorded
on the option grant date.
The Company adopted SFAS No. 123-R using the modified prospective transition method, which
requires the application of the accounting standard as of October 1, 2005, the first day of the
Companys fiscal year 2006. The Companys financial statements as of and for the three and six
months ended March 31, 2008 and 2007 reflect the impact of SFAS No. 123-R.
On November 10, 2005, the FASB issued Staff Position No. 123-R-3,
Transition Election Related
to Accounting for the Tax Effects of Share-Based Payment Awards
(Staff Position No. 123-R-3)
,
which provides a simplified alternative method to calculate the pool of excess income tax benefits
upon the adoption of SFAS No. 123-R. The Company has elected to follow the provisions of Staff
Position No. 123-R-3.
As required under SFAS No. 123-R, in calculating the share-based compensation expense for the
three and six months ended March 31, 2008 and 2007, the fair value of each option grant was
estimated on the date of grant. The Company used the Black-Scholes option pricing model with the
range of weighted-average assumptions used for option grants noted in the following table. The
expected life of the stock options represents the period of time that options granted are expected
to be outstanding and the range given below results from certain groups of employees exhibiting
different behavior with respect to the options granted to them and was determined based on an
analysis of historical exercise and cancellation behavior. This analysis is updated December 31 of
each year with applicable changes reflected in the table below. The risk-free interest rate is
based on US Treasury yield curves that approximate the expected life of the stock options in
effect on the date of the grant. The expected volatility is based on the historical volatilities
of the Companys common stock and the common stock of comparable publicly traded companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
For the Six Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Expected life
|
|
5-8 years
|
|
5-8 years
|
|
5-8 years
|
|
5-8 years
|
Risk- free interest rate
|
|
|
2.34% - 3.69
|
%
|
|
|
4.48% - 4.86
|
%
|
|
|
2.34% - 4.56
|
%
|
|
|
4.44% - 4.86
|
%
|
Expected volatility
|
|
|
33% - 40
|
%
|
|
|
39
|
%
|
|
|
33% - 41
|
%
|
|
|
39
|
%
|
Goodwill and Long-Lived Assets
Goodwill represents acquisition costs in excess of the fair
value of net identifiable tangible and intangible assets of businesses purchased. In accordance
with SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142), the Company evaluates
goodwill annually on September 30 for impairment, or earlier if indicators of potential impairment
exist. In accordance with SFAS No. 144, long-lived assets, other than goodwill, are evaluated for
impairment when events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. The determination of whether or not goodwill and/or long-lived assets have become
impaired involves a significant level of judgment in the assumptions underlying the approach used
to determine the value of the Companys reporting units. Changes in the Companys strategy,
assumptions and/or market conditions could significantly impact these judgments and require
adjustments to recorded amounts of intangible assets.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement No. 141
(Revised 2007),
Business Combinations
(SFAS
141R). SFAS 141R will change the accounting for
business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will also change
6
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
the accounting treatment and disclosures with respect to certain specific items in a business
combination. SFAS 141R is effective for annual periods beginning on or after December 15, 2008.
We expect SFAS 141R will have an impact on accounting for business combinations, but the effect
will be dependent upon any potential future acquisitions.
In December 2007, the FASB issued SFAS No. 160. Noncontrolling Interests in Consolidated
Financial Statements-an
Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by parties other than the parent, the
amount of net income attributable to the parent and to the noncontrolling interest, changes in a
parents ownership interest, and the valuation of any retained noncontrolling equity investment
when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15,
2008. The Company has not yet evaluated the potential impact of the adoption of SFAS 160.
In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 changes the
disclosure requirements for derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about how and why an entity uses derivative instruments, how
derivative instruments and related hedged items are accounted for under SFAS 133 Accounting for
Derivative Instruments and Hedging Activities and its related interpretations, and how derivative
instruments and related hedged items affect an entitys financial position, financial performance,
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November
15, 2008. The Company has not yet evaluated the potential impact of the adoption of SFAS 161.
3. Discontinued Operations
During March 2008, the Company, its physician partners and Good Samaritan Hospital
entered into a definitive agreement pursuant to which Good Samaritan Hospital will acquire
substantially all of Dayton Heart Hospitals (DHH) assets.
During September 2006, the Company decided to seek to dispose of its interest in Heart
Hospital of Lafayette (HHLf) and entered into a confidentiality and exclusivity agreement with a
potential buyer. During November 2007, the Company completed the disposition of Heart Hospital of
Lafayette.
At September 30, 2007, HHLf was in violation of a financial covenant under an $8.6 million
equipment loan to HHLf, which is guaranteed by the Company. Due to the fact that HHLf is
classified as a discontinued operation the total outstanding balance of this loan has been
included in current liabilities of discontinued operations on the consolidated balance sheet as
of September 30, 2007. This debt was paid off with the proceeds from the sale.
The results of operations of DHH and HHLf, excluding intercompany interest expense and
intercompany gain as a result of the sale, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
14,024
|
|
|
$
|
24,846
|
|
|
$
|
33,548
|
|
|
$
|
47,745
|
|
Restructuring and write-off charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,100
|
)
|
Operating expenses
|
|
|
(13,875
|
)
|
|
|
(22,087
|
)
|
|
|
(32,316
|
)
|
|
|
(43,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
149
|
|
|
|
2,759
|
|
|
|
1,232
|
|
|
|
(351
|
)
|
Loss on sale of assets and equity interest
|
|
|
|
|
|
|
(6
|
)
|
|
|
(310
|
)
|
|
|
(6
|
)
|
Other expenses, net
|
|
|
(45
|
)
|
|
|
(648
|
)
|
|
|
(605
|
)
|
|
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
104
|
|
|
|
2,105
|
|
|
|
317
|
|
|
|
(1,589
|
)
|
Income tax expense (benefit)
|
|
|
396
|
|
|
|
584
|
|
|
|
163
|
|
|
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(292
|
)
|
|
$
|
1,521
|
|
|
$
|
154
|
|
|
$
|
(3,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The principal balance sheet items of DHH and HHLf excluding intercompany debt, are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash and cash equivalents
|
|
$
|
90
|
|
|
$
|
3,617
|
|
Accounts receivable, net
|
|
|
339
|
|
|
|
6,065
|
|
Other current assets
|
|
|
2,844
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
3,273
|
|
|
$
|
13,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
26,536
|
|
|
$
|
44,506
|
|
Investments in affiliates
|
|
|
|
|
|
|
240
|
|
Other assets
|
|
|
8
|
|
|
|
156
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
$
|
26,544
|
|
|
$
|
44,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,155
|
|
|
$
|
3,799
|
|
Accrued liabilities
|
|
|
2,709
|
|
|
|
3,798
|
|
Current portion of long-term debt
and obligations under capital leases
|
|
|
226
|
|
|
|
8,213
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
6,090
|
|
|
$
|
15,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases
|
|
$
|
853
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
$
|
853
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
4. Accounts Receivable
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
153,487
|
|
|
$
|
120,806
|
|
Receivables, principally from billings to hospitals for various
cardiovascular procedures
|
|
|
6,161
|
|
|
|
4,630
|
|
Amounts due under management contracts
|
|
|
3,756
|
|
|
|
1,763
|
|
Other
|
|
|
3,898
|
|
|
|
4,058
|
|
|
|
|
|
|
|
|
|
|
|
167,302
|
|
|
|
131,257
|
|
Less allowance for doubtful accounts
|
|
|
(67,773
|
)
|
|
|
(45,314
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
99,529
|
|
|
$
|
85,943
|
|
|
|
|
|
|
|
|
5. Equity Investments
The Company owns minority interests in Avera Heart Hospital of South Dakota, Harlingen
Medical Center and certain diagnostic ventures, for which the Company neither has substantive
control over the ventures nor is the primary beneficiary. Therefore, the Company does not
consolidate the results of operations and financial position of these entities, but rather
accounts for its minority ownership interest in the hospital and other ventures as equity
investments.
The following represents summarized financial information of Avera Heart Hospital of South
Dakota for the three and six months ended March 31, 2007 and Harlingen Medical Center and Avera
Heart Hospital of South Dakota as of and for the three and six months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Six Months Ended March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Net revenue
|
|
$
|
41,267
|
|
|
$
|
17,171
|
|
|
$
|
80,823
|
|
|
$
|
34,490
|
|
Income from operations
|
|
$
|
5,446
|
|
|
$
|
4,441
|
|
|
$
|
9,950
|
|
|
$
|
8,918
|
|
Net income
|
|
$
|
5,033
|
|
|
$
|
4,163
|
|
|
$
|
9,374
|
|
|
$
|
8,347
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
September 30,
|
|
|
2008
|
|
2007
|
Current assets
|
|
$
|
40,204
|
|
|
$
|
44,331
|
|
Long-term assets
|
|
$
|
39,368
|
|
|
$
|
40,047
|
|
Current liabilities
|
|
$
|
16,222
|
|
|
$
|
17,458
|
|
Long-term liabilities
|
|
$
|
22,339
|
|
|
$
|
21,301
|
|
8
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
6. Long-term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Senior Notes
|
|
$
|
101,961
|
|
|
$
|
101,961
|
|
Notes payable to various lenders
|
|
|
45,871
|
|
|
|
47,294
|
|
|
|
|
|
|
|
|
|
|
|
147,832
|
|
|
|
149,255
|
|
Less current portion
|
|
|
(3,438
|
)
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
144,394
|
|
|
$
|
146,398
|
|
|
|
|
|
|
|
|
Debt Covenants
At March 31, 2008, the Company was in compliance with all covenants in
the instruments governing its outstanding debt.
7. Liability Insurance Coverage
During June 2006, the Company entered into a new 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. During June 2007, the Company entered into a new
one- year claims-made policy providing coverage for medical malpractice claim amounts in excess of
$3.0 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.
Because of the Companys self-insured retention levels, the Company is required to recognize
an estimated expense/liability for the amount of retained liability applicable to each malpractice
claim. As of March 31, 2008 and September 30, 2007, 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 approximately $3.8 million and $4.1 million, respectively,
which is included in other accrued liabilities on the consolidated balance sheets.
8. Accounting for Uncertainty in Income Taxes
The Company adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income Taxes, effective October 1, 2007. As a result of the
implementation, the Company recognized a $0.3 million net increase to the reserves for uncertain
tax positions. This increase was accounted for as a cumulative effect adjustment and recognized as
a reduction in beginning retained earnings in the consolidated balance sheet. Including the
cumulative effect adjustment, the Company had approximately $2.4 million of unrecognized tax
benefits as of October 1, 2007. Of this total, $0.3 million represents the amount of unrecognized
tax benefits that, if recognized, would favorably impact the effective income tax rate in any
future periods. The remaining $2.1 million represents the amount of unrecognized tax benefits for
which the ultimate deductibility is certain, but for which there is uncertainty about the timing
of deductibility. The timing of such deductibility would not impact the effective tax rate. It is
expected that the amount of unrecognized tax benefits will change in the next twelve months;
however the Company does not expect the change to have a significant impact on the results of
operations or the financial position of the Company.
The Company includes interest related to tax issues as part of net interest in the
consolidated financial statements. The Company records any applicable penalties related to tax
issues within the income tax provision. The Company had $0.2 million accrued for interest and
penalties as of October 1, 2007. The interest and penalties impact for the unrecognized tax
liabilities was immaterial to the consolidated financial results for the first quarter of fiscal
2008.
Due to the utilization of all federal net operating losses in the past three years, the
Company may be subject to examination by the Internal Revenue Service (IRS) back to September 30,
2000. In addition, the Company files income tax returns in multiple states and
local jurisdictions. Generally, the Company is subject to state and local audits going back
to years ended September 30, 2004; however, due to existing net operating loss carryforwards, the
IRS can audit back to September 30, 1998 and September 30, 1999 in a few significant states.
9. Contingencies and Commitments
Contingencies
Laws and regulations governing the Medicare and Medicaid programs are
complex, subject to interpretation and may be modified. The Company believes that it is in
compliance with such laws and regulations. However, compliance with such laws and regulations can
be subject to future government review and interpretation as well as significant regulatory action
including substantial fines and criminal penalties, as well as repayment of previously billed and
collected revenue from patient services and exclusion from the Medicare and Medicaid programs.
9
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The Company is involved in various claims and legal actions in the ordinary course of
business, including malpractice claims arising from services provided to patients that have been
asserted by various claimants and additional claims that may be asserted for known incidents
through March 31, 2008. 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.
The U.S. Department of Justice, or DOJ, conducted an investigation of a clinical trial
conducted at one of our hospitals. The investigation concerned alleged improper federal healthcare
program billings from 1998-2002 because certain endoluminal graft devices were implanted either
without an approved investigational device exception or outside of the approved protocol. The DOJ
reached a settlement under the False Claims Act with the medical practice whose physicians
conducted the clinical trial. The hospital entered into an agreement with the DOJ under which it
paid $5.8 million to the United States to settle, and obtain a release from any federal civil
false claims related to DOJs investigation. The settlement and release cover both the hospital
and the physician who conducted the clinical trial, and does not include any finding of wrong
doing or any admission of liability. The Company recorded a
$5.8 million reduction in net revenue for the year ended September 30, 2007, to establish a reserve for repayment of a portion of
Medicare reimbursement related to hospital inpatient services provided to patients from 1998-2002
in accordance with SFAS No. 5,
Accounting for Contingencies
. The $5.8 million settlement was paid
to the United States in November 2007.
Commitments
On November 10, 2005, the FASB issued Interpretation No. 45-3,
Application of
FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners
(FIN
No. 45-3), FIN No. 45-3 amends FIN No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others
, to expand the scope to
include guarantees granted to a business, such as a physicians practice, or its owner(s), that
the revenue of the business for a specified period will be at least a specified amount. Under FIN
No. 45-3, the accounting requirements of FIN No. 45 are effective for any new revenue guarantees
issued or modified on or after January 1, 2006 and the disclosure of all revenue guarantees,
regardless of whether they were recognized under FIN No. 45, is required for all interim and
annual periods beginning after January 1, 2006. Some of the Companys 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 services and anesthesiology services, among
others. These guarantees extend for the duration of the underlying service agreements and the
maximum potential future payments that the Company could be required to make under these
guarantees was approximately $5.8 million through April 2010 as of March 31, 2008. The Company
would only be required to pay this maximum amount if none of the physician groups collected fees
for services performed during the guarantee period.
10. Per Share Data
The calculation of diluted earnings (loss) per share considers the potential dilutive
effect of options to purchase 1,802,112 and 1,773,612 shares of common stock at prices ranging
from $4.75 to $33.05, which were outstanding at March 31, 2008 and 2007, respectively, as well
as 154,508 and 208,077 shares of restricted stock which were outstanding at March 31, 2008 and
2007 respectively. Of the outstanding stock options, 937,000 and 30,000 have not been included
in the calculation of diluted earnings (loss) per share for the three months ended March 31,
2008 and 2007, respectively, and 604,500 and 30,000 options have not been included in the
calculation of diluted earnings (loss) per share for the six months ended March 31, 2008 and
2007, respectively, because the options were anti-dilutive.
11. Stock Compensation Plans
Effective October 1, 2005, the Company adopted the MedCath Corporation 2006 Stock Option and
Award Plan (the Stock Plan), which provides for the issuance of stock options, restricted stock and
restricted stock units to employees of the Company. The Stock Plan is administered by the
compensation committee of the board of directors, who has the authority to select the employees
eligible to receive awards. This committee also has the authority under the Stock Plan to determine
the types of awards, select the terms and conditions attached to all awards, and, subject to the
limitation on individual awards in the Stock Plan, determine the number of shares to be awarded. At
March 31, 2008, the maximum number of shares of common stock which can be issued through awards
granted under the Stock Plan is 1,750,000, of which 756,492 are outstanding as of March 31, 2008.
The Stock Plan will expire, and no awards may be granted there under, after September 30, 2015.
Stock options granted to employees and directors under the Stock Plan have an exercise price
per share that represents the fair market value of the common stock of the Company on the
respective dates that the options are granted. The options expire ten years from the grant date,
are fully vested and are exercisable at any time. Subsequent to the exercise of the stock
options, the shares of stock acquired upon exercise may be subject to certain sale restrictions
depending on the optionees employment status and length of time the option was held prior to
exercise.
10
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
Activity for the Stock Plan and the Companys other option plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
Outstanding stock options, beginning of period
|
|
|
1,947,171
|
|
|
$
|
21.66
|
|
|
|
1,848,909
|
|
|
$
|
19.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
19,000
|
|
|
|
23.38
|
|
|
|
151,000
|
|
|
|
28.52
|
|
Exercised
|
|
|
(164,059
|
)
|
|
|
17.70
|
|
|
|
(139,747
|
)
|
|
|
14.46
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
(86,550
|
)
|
|
|
25.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options, end of period
|
|
|
1,802,112
|
|
|
$
|
22.03
|
|
|
|
1,773,612
|
|
|
$
|
19.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
Outstanding stock options, beginning of period
|
|
|
1,727,112
|
|
|
$
|
19.11
|
|
|
|
2,070,472
|
|
|
$
|
18.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
331,000
|
|
|
|
26.57
|
|
|
|
195,000
|
|
|
|
28.54
|
|
Exercised
|
|
|
(180,000
|
)
|
|
|
17.83
|
|
|
|
(341,746
|
)
|
|
|
13.35
|
|
Cancelled
|
|
|
(76,000
|
)
|
|
|
27.71
|
|
|
|
(150,114
|
)
|
|
|
23.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options, end of period
|
|
|
1,802,112
|
|
|
$
|
22.03
|
|
|
|
1,773,612
|
|
|
$
|
19.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information for options outstanding and exercisable at March 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Weighted-
|
|
|
|
|
Outstanding
|
|
Average
|
|
Weighted-
|
|
|
and
|
|
Remaining
|
|
Average
|
Range of Prices
|
|
Exercisable
|
|
Life (years)
|
|
Exercise Price
|
$4.75 15.80
|
|
|
222,912
|
|
|
|
6.23
|
|
|
$
|
12.64
|
|
15.91 18.26
|
|
|
116,700
|
|
|
|
7.63
|
|
|
|
16.22
|
|
19.00 19.77
|
|
|
81,500
|
|
|
|
3.93
|
|
|
|
19.17
|
|
21.49 21.49
|
|
|
500,000
|
|
|
|
7.89
|
|
|
|
21.49
|
|
21.66 22.50
|
|
|
320,000
|
|
|
|
8.01
|
|
|
|
22.45
|
|
23.25 27.71
|
|
|
380,500
|
|
|
|
9.15
|
|
|
|
26.42
|
|
27.80 30.24
|
|
|
105,500
|
|
|
|
8.86
|
|
|
|
29.26
|
|
30.35 33.05
|
|
|
75,000
|
|
|
|
9.01
|
|
|
|
31.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.75 33.05
|
|
|
1,802,112
|
|
|
|
7.88
|
|
|
$
|
22.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under SFAS No. 123-R, share-based compensation expense recognized for the three and six
months ended March 31, 2008 was $0.2 million and $3.9 million, respectively. The associated tax
benefits related to the compensation expense recognized for the three and six months ended March
31, 2008 was $0.1 million and $1.6 million, respectively. The compensation expense recognized
represents the compensation related to restricted stock awards over the vesting period, as well
as the value of all stock options issued during the period as all such options vest immediately.
The total intrinsic value of options exercised during the three and six months ended March 31,
2008 was $0.9 million and $1.0 million, respectively, and the total intrinsic value of options
outstanding at March 31, 2008 was $(6.9) million.
Share-based compensation expense recognized for the three and six months ended March 31,
2007 was $2.1 million and $3.1 million, respectively. The associated tax benefits related to the
compensation expense recognized for the three and six months ended March 31, 2007 was $0.9
million and $1.4 million, respectively. The compensation expense recognized represents the
compensation related to restricted stock awards over the vesting period, as well as the value of
all stock options issued during the period as all such options vest immediately. The total
intrinsic value of options exercised during the three and six months ended March 31, 2007 was
$1.8 million and $4.6 million, respectively, and the total intrinsic value of options outstanding
at March 31, 2007 was $12.0 million.
During the fiscal year ended September 30, 2006, the Company granted to employees 270,836
shares of restricted stock, which vest at various dates through March 2009. The compensation
expense, which represents the fair value of the stock measured at the market
11
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
price at the date of grant, less estimated forfeitures, is recognized on a straight-line
basis over the vesting period. Unamortized compensation expense related to restricted stock
amounted to $0.9 million at March 31, 2008
.
12. Reportable Segment Information
The Companys reportable segments consist of the hospital division and the MedCath Partners
division.
Financial information concerning the Companys operations by each of the reportable segments
as of and for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
145,134
|
|
|
$
|
163,175
|
|
|
$
|
283,213
|
|
|
$
|
310,235
|
|
MedCath Partners Division
|
|
|
11,336
|
|
|
|
12,976
|
|
|
|
21,497
|
|
|
|
25,782
|
|
Corporate and other
|
|
|
628
|
|
|
|
489
|
|
|
|
1,238
|
|
|
|
1,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
157,098
|
|
|
$
|
176,640
|
|
|
$
|
305,948
|
|
|
$
|
337,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
16,160
|
|
|
$
|
18,058
|
|
|
$
|
48,710
|
|
|
$
|
28,098
|
|
MedCath Partners Division
|
|
|
2,172
|
|
|
|
2,308
|
|
|
|
3,692
|
|
|
|
4,895
|
|
Corporate and other
|
|
|
(2,947
|
)
|
|
|
(4,797
|
)
|
|
|
(26,860
|
)
|
|
|
(7,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
15,385
|
|
|
$
|
15,569
|
|
|
$
|
25,542
|
|
|
$
|
25,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
6,588
|
|
|
$
|
6,777
|
|
|
$
|
12,488
|
|
|
$
|
13,626
|
|
MedCath Partners Division
|
|
|
1,203
|
|
|
|
1,451
|
|
|
|
2,520
|
|
|
|
2,924
|
|
Corporate and other
|
|
|
53
|
|
|
|
79
|
|
|
|
328
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
7,844
|
|
|
$
|
8,307
|
|
|
$
|
15,336
|
|
|
$
|
16,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (income) including intercompany, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
5,637
|
|
|
$
|
7,854
|
|
|
$
|
11,585
|
|
|
$
|
15,667
|
|
MedCath Partners Division
|
|
|
(2
|
)
|
|
|
(16
|
)
|
|
|
(21
|
)
|
|
|
(33
|
)
|
Corporate and other
|
|
|
(2,276
|
)
|
|
|
(3,944
|
)
|
|
|
(5,378
|
)
|
|
|
(6,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
3,359
|
|
|
$
|
3,894
|
|
|
$
|
6,186
|
|
|
$
|
8,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
11,459
|
|
|
$
|
5,077
|
|
|
$
|
23,566
|
|
|
$
|
7,628
|
|
MedCath Partners Division
|
|
|
829
|
|
|
|
340
|
|
|
|
1,117
|
|
|
|
474
|
|
Corporate and other
|
|
|
719
|
|
|
|
1,203
|
|
|
|
2,364
|
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
13,007
|
|
|
$
|
6,620
|
|
|
$
|
27,047
|
|
|
$
|
9,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Aggregate identifiable assets:
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
518,338
|
|
|
$
|
533,675
|
|
MedCath Partners Division
|
|
|
44,067
|
|
|
|
34,021
|
|
Corporate and other
|
|
|
57,065
|
|
|
|
101,719
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
619,470
|
|
|
$
|
669,415
|
|
|
|
|
|
|
|
|
Substantially all of the Companys net revenue in its hospital division and MedCath
Partners division is derived directly or indirectly from patient services. The amounts presented
for corporate and other primarily include management and consulting fees, general overhead and
administrative expenses, financing activities, certain cash and cash equivalents, prepaid
expenses, other assets and operations of the business not subject to separate segment reporting.
All of the Companys goodwill is recorded at the Corporate and other segment.
12
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
13. Public Offering
An additional 1.7 million shares of the Companys common stock were registered and sold by the
Company to the public under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-3 (File No. 333-137756) that was declared effective by the Securities and Exchange
Commission on November 6, 2006. The net proceeds to the Company from the offering were
approximately $39.7 million. The proceeds were used to repurchase $36.2 million of the Companys
outstanding 9
7/8
% senior notes due 2012 and pay approximately $3.5 million in premiums
and expenses associated with the note repurchase.
14. Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net Income
|
|
$
|
5,685
|
|
|
$
|
6,250
|
|
|
$
|
8,749
|
|
|
$
|
1,354
|
|
Changes in fair value of interest rate swaps, net of tax benefit
|
|
|
(136
|
)
|
|
|
(5
|
)
|
|
|
(245
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
5,549
|
|
|
$
|
6,245
|
|
|
$
|
8,504
|
|
|
$
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Treasury Stock
During August 2007, the board of directors approved a stock repurchase program of up to
$59.0 million. As of March 31, 2008 1,885,461 million shares of common stock, with a total cost
of $44.4 million, have been repurchased by the Company under this program, all of which were
repurchased during the six month period ended March 31, 2008.
16. Guarantor/Non-Guarantor Financial Statements
The following tables present the condensed consolidated financial information for each of
MedCath Corporation (the Parent), MedCath Holdings Corporation (the Issuer), all 95% or greater
owned domestic subsidiaries of the Issuer (the Guarantors) and the subsidiaries of the Issuer
that are not Guarantors (the Non-Guarantors), together with consolidating eliminations, as of
and for the periods indicated.
13
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,754
|
|
|
$
|
53,502
|
|
|
$
|
|
|
|
$
|
85,256
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
5,426
|
|
|
|
94,103
|
|
|
|
|
|
|
|
99,529
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
44,991
|
|
|
|
17,858
|
|
|
|
(19,543
|
)
|
|
|
43,306
|
|
Current assets of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
1,033
|
|
|
|
2,251
|
|
|
|
(11
|
)
|
|
|
3,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
|
|
|
|
83,204
|
|
|
|
167,714
|
|
|
|
(19,554
|
)
|
|
|
231,364
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
17,886
|
|
|
|
263,479
|
|
|
|
|
|
|
|
281,365
|
|
Investments in subsidiaries
|
|
|
356,688
|
|
|
|
356,688
|
|
|
|
72,389
|
|
|
|
(62
|
)
|
|
|
(785,703
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
62,740
|
|
|
|
|
|
|
|
|
|
|
|
62,740
|
|
Intercompany notes receivable
|
|
|
|
|
|
|
|
|
|
|
224,093
|
|
|
|
|
|
|
|
(224,093
|
)
|
|
|
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
13,493
|
|
|
|
3,964
|
|
|
|
|
|
|
|
17,457
|
|
Long-term assets of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
15,843
|
|
|
|
26,544
|
|
|
|
(15,843
|
)
|
|
|
26,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
356,688
|
|
|
$
|
356,688
|
|
|
$
|
489,648
|
|
|
$
|
461,639
|
|
|
$
|
(1,045,193
|
)
|
|
$
|
619,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,321
|
|
|
$
|
32,433
|
|
|
$
|
|
|
|
$
|
34,754
|
|
Accrued compensation and
benefits
|
|
|
|
|
|
|
|
|
|
|
5,885
|
|
|
|
11,209
|
|
|
|
|
|
|
|
17,094
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
6,080
|
|
|
|
26,997
|
|
|
|
(19,520
|
)
|
|
|
13,557
|
|
Current portion of long- term debt
and obligations under capital
leases
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
4,134
|
|
|
|
|
|
|
|
4,504
|
|
Current liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
4,306
|
|
|
|
1,817
|
|
|
|
(33
|
)
|
|
|
6,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
|
|
|
|
18,962
|
|
|
|
76,590
|
|
|
|
(19,553
|
)
|
|
|
75,999
|
|
Long- term debt
|
|
|
|
|
|
|
|
|
|
|
101,928
|
|
|
|
42,466
|
|
|
|
|
|
|
|
144,394
|
|
Obligations under capital leases
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
1,299
|
|
|
|
|
|
|
|
1,514
|
|
Intercompany notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,093
|
|
|
|
(224,093
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
|
|
11,855
|
|
|
|
|
|
|
|
|
|
|
|
11,855
|
|
Other long- term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
415
|
|
Long-term liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,696
|
|
|
|
(15,843
|
)
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
132,960
|
|
|
|
361,559
|
|
|
|
(259,489
|
)
|
|
|
235,030
|
|
Minority interest in equity of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,752
|
|
|
|
27,752
|
|
Total stockholders equity
|
|
|
356,688
|
|
|
|
356,688
|
|
|
|
356,688
|
|
|
|
100,080
|
|
|
|
(813,456
|
)
|
|
|
356,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
$
|
356,688
|
|
|
$
|
356,688
|
|
|
$
|
489,648
|
|
|
$
|
461,639
|
|
|
$
|
(1,045,193
|
)
|
|
$
|
619,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
MEDCATH CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
|
|
|
$
|
80,044
|
|
|
$
|
60,232
|
|
|
$
|
|
|
|
$
|
140,276
|
|
Accounts receivable, net
|
|
|
|
|
|
|
|
|
|
|
5,372
|
|
|
|
80,571
|
|
|
|
|
|
|
|
85,943
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
23,529
|
|
|
|
15,804
|
|
|
|
(6,819
|
)
|
|
|
32,514
|
|
Current assets of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
14,470
|
|
|
|
12,658
|
|
|
|
(13,448
|
)
|
|
|
13,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
|
|
|
|
123,415
|
|
|
|
169,265
|
|
|
|
(20,267
|
)
|
|
|
272,413
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
17,434
|
|
|
|
253,229
|
|
|
|
|
|
|
|
270,663
|
|
Investments in subsidiaries
|
|
|
385,624
|
|
|
|
385,624
|
|
|
|
64,167
|
|
|
|
(62
|
)
|
|
|
(835,353
|
)
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
62,740
|
|
|
|
|
|
|
|
|
|
|
|
62,740
|
|
Intercompany notes receivable
|
|
|
|
|
|
|
|
|
|
|
205,478
|
|
|
|
|
|
|
|
(205,478
|
)
|
|
|
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
15,045
|
|
|
|
3,652
|
|
|
|
|
|
|
|
18,697
|
|
Long-term assets of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
34,470
|
|
|
|
44,902
|
|
|
|
(34,470
|
)
|
|
|
44,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
385,624
|
|
|
$
|
385,624
|
|
|
$
|
522,749
|
|
|
$
|
470,986
|
|
|
$
|
(1,095,568
|
)
|
|
$
|
669,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,087
|
|
|
$
|
29,846
|
|
|
$
|
|
|
|
$
|
30,933
|
|
Income tax payable
|
|
|
|
|
|
|
|
|
|
|
10,552
|
|
|
|
|
|
|
|
|
|
|
|
10,552
|
|
Accrued compensation and
benefits
|
|
|
|
|
|
|
|
|
|
|
6,617
|
|
|
|
11,950
|
|
|
|
|
|
|
|
18,567
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
4,077
|
|
|
|
16,141
|
|
|
|
(6,797
|
)
|
|
|
13,421
|
|
Current portion of long- term debt
and obligations under capital
leases
|
|
|
|
|
|
|
|
|
|
|
473
|
|
|
|
3,616
|
|
|
|
|
|
|
|
4,089
|
|
Current liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,280
|
|
|
|
(13,470
|
)
|
|
|
15,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
|
|
|
|
22,806
|
|
|
|
90,833
|
|
|
|
(20,267
|
)
|
|
|
93,372
|
|
Long- term debt
|
|
|
|
|
|
|
|
|
|
|
101,904
|
|
|
|
44,494
|
|
|
|
|
|
|
|
146,398
|
|
Obligations under capital leases
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
1,396
|
|
|
|
|
|
|
|
1,793
|
|
Intercompany notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,478
|
|
|
|
(205,478
|
)
|
|
|
|
|
Deferred income tax liabilities
|
|
|
|
|
|
|
|
|
|
|
12,018
|
|
|
|
|
|
|
|
|
|
|
|
12,018
|
|
Other long- term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
460
|
|
|
|
|
|
|
|
460
|
|
Long-term liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,483
|
|
|
|
(34,470
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
137,125
|
|
|
|
377,144
|
|
|
|
(260,215
|
)
|
|
|
254,054
|
|
Minority interest in equity of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,737
|
|
|
|
29,737
|
|
Total stockholders equity
|
|
|
385,624
|
|
|
|
385,624
|
|
|
|
385,624
|
|
|
|
93,842
|
|
|
|
(865,090
|
)
|
|
|
385,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders
equity
|
|
$
|
385,624
|
|
|
$
|
385,624
|
|
|
$
|
522,749
|
|
|
$
|
470,986
|
|
|
$
|
(1,095,568
|
)
|
|
$
|
669,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non- Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,480
|
|
|
$
|
151,370
|
|
|
$
|
(1,752
|
)
|
|
$
|
157,098
|
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
11,641
|
|
|
|
131,824
|
|
|
|
(1,752
|
)
|
|
|
141,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
(4,161
|
)
|
|
|
19,546
|
|
|
|
|
|
|
|
15,385
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(2,869
|
)
|
|
|
(995
|
)
|
|
|
|
|
|
|
(3,864
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
5,143
|
|
|
|
(4,655
|
)
|
|
|
|
|
|
|
488
|
|
Equity in net earnings of unconsolidated
affiliates
|
|
|
5,685
|
|
|
|
5,685
|
|
|
|
10,176
|
|
|
|
|
|
|
|
(19,365
|
)
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interest, income taxes
and discontinued operations
|
|
|
5,685
|
|
|
|
5,685
|
|
|
|
8,289
|
|
|
|
13,896
|
|
|
|
(19,365
|
)
|
|
|
14,190
|
|
Minority interest share of earnings of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,114
|
)
|
|
|
(5,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and discontinued
operations
|
|
|
5,685
|
|
|
|
5,685
|
|
|
|
8,289
|
|
|
|
13,896
|
|
|
|
(24,479
|
)
|
|
|
9,076
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
2,883
|
|
|
|
216
|
|
|
|
|
|
|
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
5,685
|
|
|
|
5,685
|
|
|
|
5,406
|
|
|
|
13,680
|
|
|
|
(24,479
|
)
|
|
|
5,977
|
|
Income (loss) from discontinued
operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
(571
|
)
|
|
|
|
|
|
|
(292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,685
|
|
|
$
|
5,685
|
|
|
$
|
5,685
|
|
|
$
|
13,109
|
|
|
$
|
(24,479
|
)
|
|
$
|
5,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non- Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,915
|
|
|
$
|
170,751
|
|
|
$
|
(2,026
|
)
|
|
$
|
176,640
|
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
13,370
|
|
|
|
149,727
|
|
|
|
(2,026
|
)
|
|
|
161,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
(5,455
|
)
|
|
|
21,024
|
|
|
|
|
|
|
|
15,569
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(3,189
|
)
|
|
|
(2,504
|
)
|
|
|
|
|
|
|
(5,693
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
(662
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
7,117
|
|
|
|
(5,312
|
)
|
|
|
|
|
|
|
1,805
|
|
Equity in net earnings of unconsolidated
affiliates
|
|
|
6,250
|
|
|
|
6,250
|
|
|
|
12,201
|
|
|
|
|
|
|
|
(23,219
|
)
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interest, income taxes
and discontinued operations
|
|
|
6,250
|
|
|
|
6,250
|
|
|
|
10,162
|
|
|
|
13,058
|
|
|
|
(23,219
|
)
|
|
|
12,501
|
|
Minority interest share of earnings of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,268
|
)
|
|
|
(3,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and discontinued
operations
|
|
|
6,250
|
|
|
|
6,250
|
|
|
|
10,162
|
|
|
|
13,058
|
|
|
|
(26,487
|
)
|
|
|
9,233
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
|
|
|
|
|
4,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
6,250
|
|
|
|
6,250
|
|
|
|
5,658
|
|
|
|
13,058
|
|
|
|
(26,487
|
)
|
|
|
4,729
|
|
Income (loss) from discontinued operations,
net of taxes
|
|
|
|
|
|
|
|
|
|
|
592
|
|
|
|
929
|
|
|
|
|
|
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
13,987
|
|
|
$
|
(26,487
|
)
|
|
$
|
6,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non- Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,115
|
|
|
$
|
294,607
|
|
|
$
|
(3,774
|
)
|
|
$
|
305,948
|
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
43,905
|
|
|
|
240,275
|
|
|
|
(3,774
|
)
|
|
|
280,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
(28,790
|
)
|
|
|
54,332
|
|
|
|
|
|
|
|
25,542
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
(2,016
|
)
|
|
|
|
|
|
|
(7,796
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
11,162
|
|
|
|
(9,505
|
)
|
|
|
|
|
|
|
1,657
|
|
Equity in net earnings of unconsolidated
affiliates
|
|
|
8,749
|
|
|
|
8,749
|
|
|
|
36,980
|
|
|
|
|
|
|
|
(50,272
|
)
|
|
|
4,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interest, income taxes
and discontinued operations
|
|
|
8,749
|
|
|
|
8,749
|
|
|
|
13,572
|
|
|
|
42,811
|
|
|
|
(50,272
|
)
|
|
|
23,609
|
|
Minority interest share of earnings of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,566
|
)
|
|
|
(9,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and discontinued
operations
|
|
|
8,749
|
|
|
|
8,749
|
|
|
|
13,572
|
|
|
|
42,811
|
|
|
|
(59,838
|
)
|
|
|
14,043
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
5,231
|
|
|
|
217
|
|
|
|
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
8,749
|
|
|
|
8,749
|
|
|
|
8,341
|
|
|
|
42,594
|
|
|
|
(59,838
|
)
|
|
|
8,595
|
|
Income (loss) from discontinued operations,
net of taxes
|
|
|
|
|
|
|
|
|
|
|
408
|
|
|
|
(254
|
)
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,749
|
|
|
$
|
8,749
|
|
|
$
|
8,749
|
|
|
$
|
42,340
|
|
|
$
|
(59,838
|
)
|
|
$
|
8,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Non- Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,327
|
|
|
$
|
324,730
|
|
|
$
|
(4,031
|
)
|
|
$
|
337,026
|
|
Total operating expenses
|
|
|
|
|
|
|
|
|
|
|
25,191
|
|
|
|
290,814
|
|
|
|
(4,031
|
)
|
|
|
311,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
(8,864
|
)
|
|
|
33,916
|
|
|
|
|
|
|
|
25,052
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(7,630
|
)
|
|
|
(5,398
|
)
|
|
|
|
|
|
|
(13,028
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(4,992
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
(5,142
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
14,690
|
|
|
|
(10,165
|
)
|
|
|
|
|
|
|
4,525
|
|
Equity in net earnings of unconsolidated
affiliates
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
14,930
|
|
|
|
|
|
|
|
(14,718
|
)
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interest, income taxes
and discontinued operations
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
8,134
|
|
|
|
18,203
|
|
|
|
(14,718
|
)
|
|
|
14,327
|
|
Minority interest share of earnings of
consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,474
|
)
|
|
|
(5,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and discontinued
operations
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
8,134
|
|
|
|
18,203
|
|
|
|
(20,192
|
)
|
|
|
8,853
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
3,648
|
|
|
|
18,203
|
|
|
|
(20,192
|
)
|
|
|
4,367
|
|
(Loss) income from discontinued operations,
net of taxes
|
|
|
|
|
|
|
|
|
|
|
(2,294
|
)
|
|
|
(719
|
)
|
|
|
|
|
|
|
(3,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,354
|
|
|
$
|
1,354
|
|
|
$
|
1,354
|
|
|
$
|
17,484
|
|
|
$
|
(20,192
|
)
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
|
|
|
$
|
18,126
|
|
|
$
|
34,861
|
|
|
$
|
(33,399
|
)
|
|
$
|
19,588
|
|
Net cash (used in) provided by
investing activities
|
|
|
|
|
|
|
(27,821
|
)
|
|
|
9,594
|
|
|
|
6,114
|
|
|
|
(12,113
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
|
|
|
|
(38,595
|
)
|
|
|
(51,185
|
)
|
|
|
27,285
|
|
|
|
(62,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
|
|
|
|
(48,290
|
)
|
|
|
(6,730
|
)
|
|
|
|
|
|
|
(55,020
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
|
|
|
|
80,044
|
|
|
|
60,232
|
|
|
|
|
|
|
|
140,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
|
|
|
$
|
31,754
|
|
|
$
|
53,502
|
|
|
$
|
|
|
|
$
|
85,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDCATH CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
MedCath
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
|
|
|
$
|
(13,976
|
)
|
|
$
|
36,322
|
|
|
$
|
|
|
|
$
|
22,346
|
|
Net cash provided by (used in)
investing activities
|
|
|
(6,225
|
)
|
|
|
19,244
|
|
|
|
(28,275
|
)
|
|
|
6,225
|
|
|
|
(9,031
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
6,225
|
|
|
|
(66,647
|
)
|
|
|
(11,137
|
)
|
|
|
(6,225
|
)
|
|
|
(77,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and
cash equivalents
|
|
|
|
|
|
|
(61,379
|
)
|
|
|
(3,090
|
)
|
|
|
|
|
|
|
(64,469
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
|
|
|
|
177,972
|
|
|
|
15,533
|
|
|
|
|
|
|
|
193,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
|
|
|
$
|
116,593
|
|
|
$
|
12,443
|
|
|
$
|
|
|
|
$
|
129,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Subsequent Event
During April 2008 the Company paid $8.5 million to acquire a 27.4 percent interest in a joint
venture with Southwest Arizona Heart and Vascular Center, LLC. The joint venture provides cardiac
catheterization lab services to Yuma Regional Medical Center in Yuma, Arizona.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the interim unaudited consolidated financial
statements and related notes included elsewhere in this report, as well as the audited consolidated
financial statements and related notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K
for the
fiscal year ended September 30, 2007.
Overview
General
. We are a healthcare provider focused primarily on providing high acuity
services, predominantly the diagnosis and treatment of cardiovascular disease. We own and operate
hospitals in partnership with physicians whom we believe have established reputations for clinical
excellence. We also have partnerships with community hospital systems, and we manage the
cardiovascular program of various hospitals operated by other parties. We opened our first hospital
in 1996 and currently have ownership interests in and operate nine hospitals, including seven in
which we own a majority interest. Each of our majority-owned hospitals is a freestanding, licensed
general acute care hospital that provides a wide range of health services with a focus on
cardiovascular care. Each of our owned hospitals has a twenty-four hour emergency room staffed by
emergency department physicians. The hospitals in which we have ownership interests have a total of
616 licensed beds and are located in predominately high growth markets in seven states: Arizona,
Arkansas, California, Louisiana, New Mexico, South Dakota, and Texas
.
We are currently in the
process of developing a new hospital in Kingman, Arizona. We expect this hospital to open in late
2009 or early 2010. This hospital is designed to accommodate a total of 106 licensed beds and will
initially open with 70 licensed beds. We are expanding our patient beds by 28 licensed beds at
Arkansas Heart Hospital and 80 licensed beds at Louisiana Heart Hospital that have the capacity for
an additional 40 beds. We are also expanding our TexSAn
Heart Hospital by 60 beds that will diversify the services offered by
the hospital.
In addition to our hospitals, we currently own and/or manage eighteen cardiac diagnostic
and therapeutic facilities. Nine of these facilities are located at hospitals operated by other
parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The
remaining nine facilities are not located at hospitals and offer only diagnostic procedures.
Effective January 1, 2007, we renamed our diagnostic and therapeutic division MedCath Partners.
Basis of Consolidation.
We have included in our consolidated financial statements
hospitals and cardiac diagnostic and therapeutic facilities over which we exercise substantive
control, including all entities in which we own more than a 50% interest, as well as variable
interest entities in which we are the primary beneficiary. We have used the equity method of
accounting for entities, including variable interest entities, in which we hold less than a 50%
interest and over which we do not exercise substantive control, and are not the primary
beneficiary. Accordingly, one of the hospital in which we hold a minority interest, Avera Heart
Hospital of South Dakota, is excluded from the net revenue and operating results of our
consolidated company and our consolidated hospital division. During the fourth quarter of fiscal
2007, we sold a portion of our equity interest in Harlingen Medical Center; therefore, beginning in
July 2007, we began excluding this hospital from net revenue and operating results of our
consolidated company and our consolidated hospital division. Similarly, a number of our diagnostic
and therapeutic facilities are excluded from the net revenue and operating results of our
consolidated company and our consolidated MedCath Partners division. Our minority interest in the
results of operations for the periods discussed for these entities is recognized as part of the
equity in net earnings of unconsolidated affiliates in our statements of operations in accordance
with the equity method of accounting.
During November 2007, we completed the disposition of Heart Hospital of Lafayette. During
March 2008, we entered into a definitive agreement, along with our physician partners and Good
Samaritan Hospital, pursuant to which Good Samaritan Hospital will acquire substantially all of
Dayton Heart Hospitals assets. Accordingly, for all periods presented, the results of operations
for these hospitals have been excluded from continuing operations and are reported in income
(loss) from discontinued operations, net of taxes.
Revenue Sources by Division.
The largest percentage of our net revenue is attributable to
our hospital division. The following table sets forth the percentage contribution of each of our
consolidating divisions to consolidated net revenue in the periods indicated below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
Division
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Hospital
|
|
|
92.4
|
%
|
|
|
92.4
|
%
|
|
|
92.6
|
%
|
|
|
92.1
|
%
|
MedCath Partners
|
|
|
7.2
|
%
|
|
|
7.3
|
%
|
|
|
7.0
|
%
|
|
|
7.6
|
%
|
Corporate and other
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue Sources by Payor.
We receive payments for our services rendered to patients from
the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our
patients directly. Generally, our net revenue is determined by a number of factors, including the
payor mix, the number and nature of procedures performed and the rate of payment for the
procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the
proportion of net revenue we derive from the Medicare program is higher than that of most general
acute care hospitals. The following table sets forth the percentage of consolidated net revenue we
earned by category of payor in the periods indicated.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
Payor
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Medicare
|
|
|
38.7
|
%
|
|
|
40.9
|
%
|
|
|
38.7
|
%
|
|
|
41.7
|
%
|
Medicaid
|
|
|
6.1
|
%
|
|
|
4.0
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Commercial and other, including self-pay
|
|
|
55.2
|
%
|
|
|
55.1
|
%
|
|
|
56.8
|
%
|
|
|
53.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, executive
orders and freezes and funding reductions, all of which may significantly affect our business. In
addition, reimbursement is generally subject to adjustment following audit by third party payors,
including the fiscal intermediaries who administer the Medicare program for 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. We believe that adequate provision has been
made for any adjustments that might result from these programs; however, due to the complexity of
laws and regulations governing the Medicare and Medicaid programs, the manner in which they are
interpreted and the other complexities involved in estimating our net revenue, there is a
possibility that recorded estimates will change by a material amount in the near term.
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Statement of Operations Data
.
The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
|
% of Net Revenue
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
157,098
|
|
|
$
|
176,640
|
|
|
$
|
(19,542
|
)
|
|
|
(11.1
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
49,638
|
|
|
|
55,977
|
|
|
|
(6,339
|
)
|
|
|
(11.3
|
)%
|
|
|
31.6
|
%
|
|
|
31.7
|
%
|
Medical supplies expense
|
|
|
43,097
|
|
|
|
47,099
|
|
|
|
(4,002
|
)
|
|
|
(8.5
|
)%
|
|
|
27.4
|
%
|
|
|
26.6
|
%
|
Bad debt expense
|
|
|
10,332
|
|
|
|
14,635
|
|
|
|
(4,303
|
)
|
|
|
(29.4
|
)%
|
|
|
6.6
|
%
|
|
|
8.3
|
%
|
Other operating expenses
|
|
|
30,419
|
|
|
|
34,257
|
|
|
|
(3,838
|
)
|
|
|
(11.2
|
)%
|
|
|
19.4
|
%
|
|
|
19.4
|
%
|
Pre-opening expenses
|
|
|
245
|
|
|
|
|
|
|
|
245
|
|
|
|
100.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
Depreciation
|
|
|
7,709
|
|
|
|
8,180
|
|
|
|
(471
|
)
|
|
|
(5.8
|
)%
|
|
|
4.9
|
%
|
|
|
4.6
|
%
|
Amortization
|
|
|
135
|
|
|
|
127
|
|
|
|
8
|
|
|
|
6.3
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Loss on disposal of property, equipment
and other assets
|
|
|
138
|
|
|
|
796
|
|
|
|
(658
|
)
|
|
|
82.7
|
%
|
|
|
0.1
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
15,385
|
|
|
|
15,569
|
|
|
|
(184
|
)
|
|
|
(1.2
|
)%
|
|
|
9.8
|
%
|
|
|
8.8
|
%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,864
|
)
|
|
|
(5,693
|
)
|
|
|
1,829
|
|
|
|
32.1
|
%
|
|
|
(2.5
|
)%
|
|
|
(3.2
|
)%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(662
|
)
|
|
|
662
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
(0.3
|
)%
|
Interest and other income, net
|
|
|
488
|
|
|
|
1,805
|
|
|
|
(1,317
|
)
|
|
|
(73.0
|
)%
|
|
|
0.3
|
%
|
|
|
1.0
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
2,181
|
|
|
|
1,482
|
|
|
|
699
|
|
|
|
47.2
|
%
|
|
|
1.4
|
%
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority
interest, income taxes and discontinued operations
|
|
|
14,190
|
|
|
|
12,501
|
|
|
|
1,689
|
|
|
|
13.5
|
%
|
|
|
9.0
|
%
|
|
|
7.1
|
%
|
Minority interest share of earnings of consolidated
subsidiaries
|
|
|
(5,114
|
)
|
|
|
(3,268
|
)
|
|
|
(1,846
|
)
|
|
|
(56.5
|
)%
|
|
|
(3.2
|
)%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
and discontinued operations
|
|
|
9,076
|
|
|
|
9,233
|
|
|
|
(157
|
)
|
|
|
(1.7
|
)%
|
|
|
5.8
|
%
|
|
|
5.2
|
%
|
Income tax expense
|
|
|
3,099
|
|
|
|
4,504
|
|
|
|
(1,405
|
)
|
|
|
(31.2
|
)%
|
|
|
2.0
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
5,977
|
|
|
|
4,729
|
|
|
|
1,248
|
|
|
|
26.4
|
%
|
|
|
3.8
|
%
|
|
|
2.6
|
%
|
Income (loss) from discontinued operations, net of taxes
|
|
|
(292
|
)
|
|
|
1,521
|
|
|
|
(1,813
|
)
|
|
|
(119.2
|
)%
|
|
|
(0.2
|
)%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,685
|
|
|
$
|
6,250
|
|
|
$
|
(565
|
)
|
|
|
(9.0
|
)%
|
|
|
3.6
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harlingen Medical Center is treated as an unconsolidated equity investment for the three months
ended March 31, 2008 whereas it was consolidated for the three months ended March 31, 2007. For
comparison purposes, the selected operating data below are presented on an actual basis and on a
same facility basis. Same facility basis reflects Harlingen Medical Center as though it was an
equity investment for the three months ended March 31, 2007. The following table presents selected
operating data on a consolidated basis and a same facility basis for the periods indicated:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Same
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
Facility
|
|
% Change
|
Selected Operating Data (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Licensed beds (b)
|
|
|
449
|
|
|
|
533
|
|
|
|
|
|
|
|
421
|
|
|
|
|
|
Staffed and available beds (c)
|
|
|
433
|
|
|
|
512
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
Admissions (d)
|
|
|
7,855
|
|
|
|
9,876
|
|
|
|
(20.5
|
)%
|
|
|
7,929
|
|
|
|
(0.9
|
)%
|
Adjusted admissions (e)
|
|
|
10,817
|
|
|
|
13,470
|
|
|
|
(19.7
|
)%
|
|
|
10,338
|
|
|
|
4.6
|
%
|
Patient days (f)
|
|
|
29,039
|
|
|
|
34,010
|
|
|
|
(14.6
|
)%
|
|
|
28,156
|
|
|
|
3.1
|
%
|
Adjusted patient days (g)
|
|
|
40,247
|
|
|
|
46,173
|
|
|
|
(12.8
|
)%
|
|
|
36,755
|
|
|
|
9.5
|
%
|
Average length of stay (days) (h)
|
|
|
3.70
|
|
|
|
3.44
|
|
|
|
7.6
|
%
|
|
|
3.55
|
|
|
|
4.2
|
%
|
Occupancy (i)
|
|
|
73.7
|
%
|
|
|
73.8
|
%
|
|
|
|
|
|
|
77.4
|
%
|
|
|
|
|
Inpatient catheterization procedures (j)
|
|
|
4,225
|
|
|
|
4,904
|
|
|
|
(13.8
|
)%
|
|
|
4,666
|
|
|
|
(9.5
|
)%
|
Inpatient surgical procedures (k)
|
|
|
2,120
|
|
|
|
2,565
|
|
|
|
(17.3
|
)%
|
|
|
2,049
|
|
|
|
3.5
|
%
|
Hospital net revenue (in thousands except percentages)
|
|
$
|
144,778
|
|
|
$
|
162,092
|
|
|
|
(10.7
|
)%
|
|
$
|
138,213
|
|
|
|
4.7
|
%
|
|
|
|
(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. During the fourth quarter of fiscal 2007, Harlingen Medical Center ceased to be a
consolidated subsidiary due to the sale of a portion of our equity interest in the hospital.
|
|
(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 is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.
|
|
(f)
|
|
Patient days represent the total number of days of care provided to inpatients.
|
|
(g)
|
|
Adjusted patient days is a general measure of combined inpatient and outpatient volume. We computed adjusted patient days
by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.
|
|
(h)
|
|
Average length of stay (days) represents the average number of days inpatients stay in our hospitals.
|
|
(i)
|
|
We computed occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the
number of staffed and available beds.
|
|
(j)
|
|
Inpatients with a catheterization procedure 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.
Net revenue decreased 11.1% or $19.5 million to $157.1 million for the three
months ended March 31, 2008, the second quarter of our fiscal year 2008, from $176.6 million for
the three months ended March 31, 2007, the second quarter of our fiscal year 2007. During the
second quarter of 2007 we consolidated Harlingen Medical Center. Harlingen Medical Center is
treated as an unconsolidated equity investment for the second quarter of fiscal 2008. Net revenue
on a same facility basis (comparing the Companys second quarter of fiscal 2008 to the second quarter of
fiscal 2007 excluding the actual results of Harlingen Medical Center), was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Net revenue
|
|
|
157,098
|
|
|
|
152,760
|
|
|
|
4,338
|
|
|
|
2.8
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
On a consolidated same facility basis, net revenue increased 2.8% from the second quarter
of fiscal 2007 to the same quarter of fiscal 2008. Same facility hospital adjusted admissions
increased 4.6% and adjusted patient days increased 9.5% in the second quarter of fiscal 2008
compared to the second quarter of fiscal 2007. The increase in adjusted admissions can be mainly
attributed to growth in our outpatient services in certain markets, offset by a reduction in our
inpatient volumes of certain of our hospitals. Our outpatient same facility patient net revenue
has also increased to approximately 31% of same facility patient net revenue for the second quarter
of fiscal 2008 from approximately 26% of same facility patient net revenue for the second quarter
of fiscal 2007. Net revenue was also favorably impacted by increases
in rate reimbursement from certain commercial payors due to our
negotiation efforts.
Our
same facility net revenue was impacted by higher uncompensated care
discounts that are recorded as a reduction to gross revenue. The
increase in uncompensated care discounts reflects our attempts to
more appropriately apply our charity care policy as we are
experiencing an increase in the number of patients applying and
qualifying for charity discounts. We
also experienced reductions in our same facility open-heart surgical procedures,
which declined 2.8%.
21
Personnel expense.
Personnel expense decreased 11.3% to $49.6 million for the second
quarter of fiscal 2008 from $56.0 million for the second quarter of fiscal 2007. Personnel expense
on a same facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Personnel expense
|
|
|
49,638
|
|
|
|
49,216
|
|
|
|
422
|
|
|
|
0.9
|
%
|
|
|
31.6
|
%
|
|
|
32.2
|
%
|
The $0.4 million increase in personnel expense on a same facility basis was primarily due
to the increase in clinical labor to support the increase in adjusted admissions offset by a reduction in
contract labor expense. Personnel expense as a percentage of net revenue declined
for the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007.
Medical supplies expense.
Medical supplies expense decreased 8.5% to $43.1 million for
the second quarter of fiscal 2008 from $47.1 million for the second quarter of fiscal 2007. On a
same facility basis, medical supplies expense decreased 1.6% as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Medical supplies expense
|
|
|
43,097
|
|
|
|
43,789
|
|
|
|
(692
|
)
|
|
|
(1.6
|
)%
|
|
|
27.4
|
%
|
|
|
28.7
|
%
|
The 1.6% decrease in medical supplies expense on a same facility basis during the three
months ended March 31, 2008 is a result of continued price reductions due to our supply chain
initiatives and a change in procedural mix offset by a 4.6% increase in adjusted admissions on a
same facility basis.
Bad debt expense.
Bad debt expense decreased 29.4% to $10.3 million for the second
quarter of fiscal 2008 from $14.6 million for the second quarter of fiscal 2007. As a percentage of
net revenue, bad debt expense decreased to 6.6% from 8.3% for the three months ended March 31, 2008
and 2007, respectively. Bad debt expense on a same facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Bad debt expense
|
|
|
10,332
|
|
|
|
9,579
|
|
|
|
753
|
|
|
|
7.9
|
%
|
|
|
6.6
|
%
|
|
|
6.3
|
%
|
The 7.9% increase in bad debt expense on a same facility basis is attributable to the
aging of accounts receivable which we believe is due to general economic conditions and an increase
in the patients portion of accounts due after insurance as a result of an increase in commercial
payors for the first quarter of fiscal 2008 compared to the same period of fiscal 2007.
Other operating expenses.
Other operating expenses decreased 11.2% to $30.4 million for
the three months ended March 31, 2008 from $34.3 million for the three months ended March 31, 2007.
On a same facility basis, other operating expenses increased 2.4% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Other operating expense
|
|
|
30,419
|
|
|
|
29,700
|
|
|
|
719
|
|
|
|
2.4
|
%
|
|
|
19.4
|
%
|
|
|
19.4
|
%
|
Other
operating expenses increased 2.4% for the second quarter of fiscal
2008 compared to the same period of fiscal 2007 but the percentage of
net revenue remained flat.
Other
operating expenses increased as a result of an increase in contract
service expense due to an increase in adjusted admissions offset by an overall reduction in our projected
medical malpractice insurance claims as a result of our actual claims incurred at several of our
facilities.
Interest expense.
Interest expense decreased $1.8 million or 32.1% to $3.9 million for
the second quarter of fiscal 2008 from $5.7 million for the second quarter of fiscal 2007. The
$1.8 million decrease in interest expense is primarily attributable to the overall reduction in our
outstanding debt as we repurchased approximately $36.2 million of our senior notes and repaid
$21.2 million of our REIT loan at one of our facilities during the first quarter of fiscal 2007.
Loss on early extinguishment of debt.
, There was no loss for the early extinguishment of
debt during the second quarter of fiscal 2008, as compared to an approximate $.7 million loss on
the early extinguishment of debt during the second quarter of fiscal 2007. During the second
quarter of fiscal 2007, this loss was comprised of the write-off of deferred loan acquisition costs
and prepayment penalties related to the prepayment of debt.
Interest and other income, net.
Interest and other income, net, decreased to $0.5 million
for the second quarter of fiscal 2008 from
22
$1.8 million for the second quarter of fiscal 2007. The decrease in interest and other income
is a direct result of the approximately $43.8 million decrease in our cash balance from March 31,
2007 to March 31, 2008 and a reduction in interest earned on cash balances. Our cash balance
decreased approximately $44.4 million as a result of stock repurchases during the first and second
quarters of fiscal 2008.
Equity in net earnings of unconsolidated affiliates.
Equity in net earnings of
unconsolidated affiliates increased approximately $0.7 million for the second quarter of fiscal
2008 compared to the second quarter of fiscal 2007. For the second quarter of fiscal 2008 we
reported Harlingen Medical Center as an equity investment and recorded our allocation of the
hospitals income for the second quarter in equity in net earnings of unconsolidated affiliates.
Therefore, equity in net earnings of unconsolidated affiliates for the second quarter of fiscal
2008 includes the earnings at two hospitals in which we hold less than a 50% interest as opposed to
only one hospital for the second quarter of fiscal 2007. The impact
of these two hospitals during the second quarter of 2008 was approximately
$0.4 million. The remaining increase is attributable to a
$0.3 million increase in the MedCath Partners division as a result of new ventures.
Minority interest share of earnings of consolidated subsidiaries.
Minority interest share
of earnings of consolidated subsidiaries increased to $5.1 million for the second quarter of fiscal
2008 from $3.3 million for the second quarter of fiscal 2007. This $1.8 million increase was
primarily due to the net increase in earnings of certain of our established hospitals and MedCath
Partners ventures which were allocated to our minority partners
on a pro rata basis. In addition one of our hospitals in which we
received a disproportionate share of income in the second quarter of
fiscal 2007 now shares income on a pro-rata basis between us and the
physician members. We expect our
earnings allocated to minority interests to fluctuate in future periods as we either recognize
disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For
a more complete discussion of our accounting for minority 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, 2007.
Income tax expense.
Income tax expense was $3.1 million for the second quarter of fiscal
2008 compared to $4.5 million for the second quarter of fiscal 2007, which represents an effective
tax rate of approximately 34.1% and 48.8% for the respective periods
.
Income from discontinued operations, net of taxes.
Income from discontinued operations,
net of taxes, reflects the results of Dayton Heart Hospital and the Heart Hospital of Lafayette for
the second quarter of fiscal 2008 and fiscal 2007, respectively. Income from discontinued
operations decreased to $(0.3) million for the second quarter of fiscal 2008 from $1.5 million for
the second quarter of fiscal 2007. The decrease is primarily a result of the operations of Dayton Heart
Hospital. Dayton Heart Hospitals net income (loss), net of
taxes which declined $1.0 million during
the second quarter of fiscal 2008 compared to the second quarter of fiscal 2007 as a result of
lower market share and increased operating expenses. The remaining
decline is due to losses incurred upon the sale of The Heart Hospital
of Lafayette.
23
Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007
Statement of Operations Data
.
The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
|
% of Net Revenue
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
305,948
|
|
|
$
|
337,026
|
|
|
$
|
(31,078
|
)
|
|
|
(9.2
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
100,503
|
|
|
|
107,918
|
|
|
|
(7,415
|
)
|
|
|
(6.9
|
)%
|
|
|
32.9
|
%
|
|
|
32.0
|
%
|
Medical supplies expense
|
|
|
82,726
|
|
|
|
91,254
|
|
|
|
(8,528
|
)
|
|
|
(9.3
|
)%
|
|
|
27.0
|
%
|
|
|
27.1
|
%
|
Bad debt expense
|
|
|
21,617
|
|
|
|
27,762
|
|
|
|
(6,145
|
)
|
|
|
(22.1
|
)%
|
|
|
7.1
|
%
|
|
|
8.2
|
%
|
Other operating expenses
|
|
|
59,565
|
|
|
|
67,358
|
|
|
|
(7,793
|
)
|
|
|
(11.6
|
)%
|
|
|
19.5
|
%
|
|
|
20.0
|
%
|
Pre-opening expenses
|
|
|
493
|
|
|
|
|
|
|
|
493
|
|
|
|
100.0
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Depreciation
|
|
|
15,074
|
|
|
|
16,450
|
|
|
|
(1,376
|
)
|
|
|
(8.4
|
)%
|
|
|
4.9
|
%
|
|
|
4.9
|
%
|
Amortization
|
|
|
262
|
|
|
|
379
|
|
|
|
(117
|
)
|
|
|
(30.9
|
)%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Loss on disposal of property, equipment and other
assets
|
|
|
166
|
|
|
|
853
|
|
|
|
(687
|
)
|
|
|
80.5
|
%
|
|
|
|
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
25,542
|
|
|
|
25,052
|
|
|
|
490
|
|
|
|
2.0
|
%
|
|
|
8.3
|
%
|
|
|
7.4
|
%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,796
|
)
|
|
|
(13,028
|
)
|
|
|
5,232
|
|
|
|
40.2
|
%
|
|
|
(2.5
|
)%
|
|
|
(3.9
|
)%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(5,142
|
)
|
|
|
5,142
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
(1.5
|
)%
|
Interest and other income, net
|
|
|
1,657
|
|
|
|
4,525
|
|
|
|
(2,868
|
)
|
|
|
(63.4
|
)%
|
|
|
0.5
|
%
|
|
|
1.3
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
4,206
|
|
|
|
2,920
|
|
|
|
1,286
|
|
|
|
44.0
|
%
|
|
|
1.4
|
%
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority
interest, income taxes and discontinued operations
|
|
|
23,609
|
|
|
|
14,327
|
|
|
|
9,282
|
|
|
|
64.8
|
%
|
|
|
7.7
|
%
|
|
|
4.2
|
%
|
Minority interest share of earnings of consolidated
subsidiaries
|
|
|
(9,566
|
)
|
|
|
(5,474
|
)
|
|
|
(4,092
|
)
|
|
|
(74.7
|
)%
|
|
|
(3.1
|
)%
|
|
|
(1.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes and discontinued operations
|
|
|
14,043
|
|
|
|
8,853
|
|
|
|
5,190
|
|
|
|
58.6
|
%
|
|
|
4.6
|
%
|
|
|
2.6
|
%
|
Income tax expense
|
|
|
5,448
|
|
|
|
4,486
|
|
|
|
962
|
|
|
|
21.4
|
%
|
|
|
1.8
|
%
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
8,595
|
|
|
|
4,367
|
|
|
|
4,228
|
|
|
|
96.8
|
%
|
|
|
2.8
|
%
|
|
|
1.3
|
%
|
Income (loss) from discontinued operations, net of taxes
|
|
|
154
|
|
|
|
(3,013
|
)
|
|
|
3,167
|
|
|
|
(105.1
|
)%
|
|
|
0.1
|
%
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,749
|
|
|
$
|
1,354
|
|
|
|
7,395
|
|
|
|
546.2
|
%
|
|
|
2.9
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harlingen Medical Center is treated as an unconsolidated equity investment for the six months ended
March 31, 2008 whereas it was consolidated for the six months ended March 31, 2007. For comparison
purposes, the selected operating data below are presented on an actual basis and on a same facility
basis. Same facility basis reflects Harlingen Medical Center as though it was an equity investment
for the six months ended March 31, 2008. The following table presents selected operating data on a
consolidated basis and a same facility basis for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Same
|
|
|
|
|
2008
|
|
2007
|
|
% Change
|
|
Facility
|
|
% Change
|
Selected Operating Data (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
Licensed beds ( b )
|
|
|
449
|
|
|
|
533
|
|
|
|
|
|
|
|
421
|
|
|
|
|
|
Staffed and available beds ( c )
|
|
|
433
|
|
|
|
512
|
|
|
|
|
|
|
|
404
|
|
|
|
|
|
Admissions ( d )
|
|
|
15,005
|
|
|
|
18,810
|
|
|
|
(20.2
|
)%
|
|
|
15,020
|
|
|
|
(0.1
|
)%
|
Adjusted admissions ( e )
|
|
|
20,645
|
|
|
|
25,711
|
|
|
|
(19.7
|
)%
|
|
|
19,529
|
|
|
|
5.7
|
%
|
Patient days ( f )
|
|
|
54,499
|
|
|
|
64,767
|
|
|
|
(15.9
|
)%
|
|
|
53,907
|
|
|
|
1.1
|
%
|
Adjusted patient days ( g )
|
|
|
75,381
|
|
|
|
88,021
|
|
|
|
(14.4
|
)%
|
|
|
70,306
|
|
|
|
7.2
|
%
|
Average length of stay (days) ( h )
|
|
|
3.63
|
|
|
|
3.44
|
|
|
|
5.5
|
%
|
|
|
3.59
|
|
|
|
1.1
|
%
|
Occupancy ( i )
|
|
|
68.8
|
%
|
|
|
69.5
|
%
|
|
|
|
|
|
|
73.3
|
%
|
|
|
|
|
Inpatients with a catheterization procedure (j)
|
|
|
8,274
|
|
|
|
9,284
|
|
|
|
(10.9
|
)%
|
|
|
8,866
|
|
|
|
(6.7
|
)%
|
Inpatient surgical procedures (k)
|
|
|
4,069
|
|
|
|
4,910
|
|
|
|
(17.1
|
)%
|
|
|
3,950
|
|
|
|
3.0
|
%
|
Hospital net revenue (in thousands except percentages)
|
|
$
|
281,929
|
|
|
$
|
307,987
|
|
|
|
(8.5
|
)%
|
|
$
|
265,654
|
|
|
|
6.1
|
%
|
|
|
|
(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. During the fourth quarter of fiscal 2007, Harlingen Medical Center ceased to be a
consolidated subsidiary due to the sale of a portion of our equity interest in the hospital.
|
|
(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.
|
24
|
|
|
(e)
|
|
Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.
|
|
(f)
|
|
Patient days represent the total number of days of care provided to inpatients.
|
|
(g)
|
|
Adjusted patient days is a general measure of combined inpatient and outpatient volume. We computed adjusted patient days
by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.
|
|
(h)
|
|
Average length of stay (days) represents the average number of days inpatients stay in our hospitals.
|
|
(i)
|
|
We computed occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the
number of staffed and available beds.
|
|
(j)
|
|
Inpatients with a catheterization procedure 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.
Net revenue decreased 9.2% or $31.1 million to $305.9 million for the six
months ended March 31, 2008 from $337.0 million for the six months ended March 31, 2007. During the
first six months of 2007 we consolidated Harlingen Medical Center. Harlingen Medical Center is
treated as an unconsolidated equity investment for the first sixth months of fiscal 2008. Net
revenue on a same facility basis (comparing the first six months of fiscal 2008 to the first six
months of fiscal 2007 excluding the actual results of Harlingen Medical Center), was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Net revenue
|
|
|
305,948
|
|
|
|
294,693
|
|
|
|
11,255
|
|
|
|
3.8
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
On a consolidated same facility basis, net revenue increased 3.8% from the first six
months of fiscal 2007 compared to the same period of fiscal 2008. Same facility hospital adjusted
admissions increased 5.7% and adjusted patient days increased 7.2% in the first six months of
fiscal 2008 compared to the first six months of fiscal 2007. The increase in adjusted admissions
can be mainly attributed to growth in our outpatient services in certain markets, offset by a
reduction in our inpatient volumes of certain of our hospitals.
Personnel expense.
Personnel expense decreased 6.9% to $100.5 million for the first six
months of fiscal 2008 from $107.9 million for the first six months of fiscal 2007. Personnel
expense on a same facility basis was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Personnel expense
|
|
|
100,503
|
|
|
|
95,111
|
|
|
|
5,392
|
|
|
|
5.7
|
%
|
|
|
32.9
|
%
|
|
|
32.3
|
%
|
Personnel
expense increased primarily as a result of the 5.7% increase in adjusted
admissions on a same facility basis. In addition there was an increase in stock based compensation
expense of $0.8 million in the first six months of fiscal 2008 compared to the same period of
fiscal 2007 as a result of stock options awarded to employees, directors and certain executives by
the compensation committee in November 2007.
Medical supplies expense.
Medical supplies expense decreased 9.3% to $82.7 million for
the first six months of fiscal 2008 from $91.3 million for the first six months of fiscal 2007. On
a same facility basis, medical supplies expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Medical supplies expense
|
|
|
82,726
|
|
|
|
85,326
|
|
|
|
(2,600
|
)
|
|
|
(3.0
|
)%
|
|
|
27.0
|
%
|
|
|
29.0
|
%
|
The $2.6 million or 3.0% decrease in medical supplies expense on a same facility basis
during the six months ended March 31, 2008 is a result of continued price reductions due to our
supply chain initiatives and a decrease in higher cost procedures offset by a 5.7% increase in
adjusted admissions on a same facility basis.
Bad debt expense.
Bad debt expense decreased 22.1% to $21.6 million for the first six
months of fiscal 2008 from $27.8 million for the first six months of fiscal 2007. As a percentage
of net revenue, bad debt expense decreased to 7.1% from 8.2% for the six months ended March 31,
2008 and 2007, respectively. Bad debt expense on a same facility basis was as follows:
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Bad debt expense
|
|
|
21,617
|
|
|
|
19,129
|
|
|
|
2,488
|
|
|
|
13.0
|
%
|
|
|
7.1
|
%
|
|
|
6.5
|
%
|
The 13.0% increase in bad debt expense on a same facility basis is attributable to an
increase in aged accounts as a result of general economic conditions and an increase in self pay
patient revenue for the last twelve months and an increase in the patients portion of accounts due
after insurance as a result of an increase in commercial payors for the first six months of fiscal
2008 compared to the same period of fiscal 2007.
Other operating expenses.
Other operating expenses decreased 11.6% to $59.6 million for
the six months ended March 31, 2008 from $67.4 million for the six months ended March 31, 2007. On
a same facility basis, other operating expenses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Other operating expense
|
|
|
59,565
|
|
|
|
58,727
|
|
|
|
838
|
|
|
|
1.4
|
%
|
|
|
19.5
|
%
|
|
|
19.9
|
%
|
Other operating expenses were favorably impacted by an overall reduction in our projected
medical malpractice insurance claims as a result of our actual claims incurred at several of our
facilities. The percentage of other operating expense to net revenue has remained consistent for
the first six months of fiscal 2008 compared to the same period of fiscal 2007.
Interest expense.
Interest expense decreased 40.0% to $7.8 million for the first six
months of fiscal 2008 from $13.0 million for the first six months of fiscal 2007 or a decrease of
26.9% or $2.9 million on a same facility basis as shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
% of Net Revenue
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
Interest expense
|
|
|
7,796
|
|
|
|
10,658
|
|
|
|
2,862
|
|
|
|
26.9
|
%
|
|
|
2.5
|
%
|
|
|
3.6
|
%
|
During the first six months of fiscal 2007 we repurchased approximately $36.2 million of our senior
notes and repaid $21.2 million of our REIT loan at one of our facilities which has reduced interest
expense on an annual basis.
Loss on early extinguishment of debt.
There was no loss for the early extinguishment of
debt during the first six months of fiscal 2008, as compared to an approximate $5.1 million loss on
the early extinguishment of debt during the first six months of fiscal 2007. During the first six
months of fiscal 2007, this loss consisted of a $3.5 million repurchase premium and the write off
of approximately $1.0 million of deferred loan acquisition costs related to the prepayment of a
portion of our senior notes. We also incurred $0.6 million in deferred loan acquisition costs in
the first six months of fiscal 2007 related to the prepayment of $39.9 million of our senior
secured credit facility.
Interest and other income, net.
Interest and other income, net, decreased to $1.7 million
for the first six months of fiscal 2008 from $4.5 million for the first six months of fiscal 2007.
The decrease in interest and other income is a direct result of the approximately $43.8 million
decrease in our cash balance from March 31, 2007 to March 31, 2008.
Equity in net earnings of unconsolidated affiliates.
Equity in net earnings of
unconsolidated affiliates increased approximately $1.3 million for the first six months of fiscal
2008 compared to the first six months of fiscal 2007. For the first six months of fiscal 2008 we
reported Harlingen Medical Center as an equity investment and recorded our allocation of the
hospitals income for the first six months in equity in net earnings of unconsolidated affiliates.
Therefore, equity in net earnings of unconsolidated affiliates for the first six months of fiscal
2008 includes the earnings at two hospitals in which we hold less than a 50% interest as opposed to
only one hospital for the first six months of fiscal 2007. The remainder of equity in earnings of
unconsolidated affiliates is attributable to earnings in various MedCath Partners diagnostic
ventures in which we hold less than a 50% interest. The impact of reporting Harlingen Medical
Center as an unconsolidated affiliate during the first six months of 2008 was approximately
$0.2 million. The remaining $1.1 million increase is attributable to a $0.7 million increase in the
MedCath Partners division and a $0.2 million increase in other ventures.
Minority interest share of earnings of consolidated subsidiaries.
Minority interest share
of earnings of consolidated subsidiaries increased to $9.6 million for the first six months of
fiscal 2008 from $5.5 million for the first six months of fiscal 2007. This $4.1 million increase
was primarily due to the net increase in earnings of certain of our established hospitals and
MedCath Partners ventures which were allocated to our minority partners on a pro rata basis. We
expect our earnings allocated to minority interests to fluctuate in future periods as we either
recognize disproportionate losses and/or recoveries thereof through disproportionate profit
recognition. For a more complete discussion of our accounting for minority 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, 2007.
Income tax expense.
Income tax expense was $5.4 million for the first six months of
fiscal 2008 compared to $4.5 million for the
26
first six months of fiscal 2007, which represents an effective tax rate of approximately 38.8% and
50.7% for the respective periods
.
Income
(
loss) from discontinued operations, net of taxes.
Income from discontinued
operations, net of taxes, reflects the results of Dayton Heart Hospital and the Heart Hospital of
Lafayette for the first six months of fiscal 2007 and fiscal 2008. Net income from discontinued
operations was $0.2 million for the first six months of fiscal 2008 compared to a loss of
$3.0 million for the first six months of fiscal 2007. In accordance with SFAS No. 144, the Company
evaluated the carrying value of the long-lived assets related to Heart Hospital of Lafayette during
the first six months of fiscal 2007 and determined that the carrying value was in excess of the
fair value. Accordingly, an impairment charge of $4.1 million was recorded in accordance with SFAS
No. 144 during the first quarter of fiscal 2007. The $4.1 million impairment charge was offset by
net income related to Dayton Heart Hospital for the first six months of fiscal 2007.
Liquidity and Capital Resources
Working Capital and Cash Flow Activities
. Our consolidated working capital was
$155.4 million at March 31, 2008 and $179.0 million at September 30, 2007. During the first six
months of fiscal 2008 we used cash on hand to repurchase $44.4 million of our shares and paid our
income tax liabilities and accrued bonuses to our employees. The cash outlays were offset by the
sale of certain assets and liabilities of Heart Hospital of Lafayette. As a result of the sale, our
net cash position increased by approximately $16.2 million
during the first six months of fiscal 2008.
The cash provided by operating activities from continuing operations was $15.7 million
for the first six months of fiscal 2008 compared to $24.4 million provided by operating activities
for the first six months of fiscal 2007. The decrease in cash provided by continuing operations is
a result of an increase in operational expenditures resulting from increases in net revenues on a
same facility basis, as well as cash used from continuing operations during the first six months of
fiscal 2008 to pay income tax liabilities and accrued bonuses related
to fiscal 2007 performance to our employees. We also paid a
$5.8 million settlement to the United States Department of
Justice as a result of an investigation of a clinical trial conducted
at one of our hospitals.
Our investing activities from continuing operations used net cash of $35.9 million for
the first six months of fiscal 2008 compared to net cash used of $9.2 million for the first six
months of fiscal 2007. The total cash used for capital expenditures related to building expansions
increased $8.7 million during the first six months of 2008 compared to the first six months of
fiscal 2007 as a result of the expansion of several of our hospital facilities and the construction
of a new acute care hospital in Kingman Arizona. We also used approximately $9.5 million to acquire
interests in ventures in our Partners division, of which $8.5 million is restricted. This is offset
by approximately $.6 million in cash received from the sale of a part of our interest in Harlingen
Medical Center during the second quarter of fiscal 2008. The increase in capital expenditures for
continuing operations was offset by the $24.3 million in cash received as a result of the sale of
our discontinued operation, Heart Hospital of Lafayette, during the first six months of fiscal
2008.
Our financing activities from continuing operations used net cash of $54.5 million for
the first six months of fiscal 2008 compared to net cash used of $76.1 million for the first six
months of fiscal 2007. The $54.5 million of net cash used for financing activities for the first
six months of fiscal 2008 is primarily a result of the $44.4 million purchase of treasury shares
and distributions to minority partners of $12.7 million.
Capital Expenditures.
Expenditures for property and equipment for the first six months of
fiscal years 2008 and 2007 were $27.0 million and $9.8 million, respectively. During the six
months ended March 31, 2008, we continued the development of our hospital in Kingman, Arizona and
the expansion projects at two of our existing hospitals. The amount of capital expenditures we
incur in future periods will depend largely on the type and size of strategic investments we make
in future periods.
Obligations and Availability of Financing.
At March 31, 2008, we had $150.4 million of
outstanding debt, $4.5 million of which was classified as current. Of the outstanding debt, $102.0
million was outstanding under our 9⅞% senior notes and $47.8 million was
outstanding to lenders to our hospitals. The remaining $0.6 million of debt was outstanding to
lenders under capital leases and other miscellaneous indebtedness. No amounts were outstanding to
lenders under our $100.0 million revolving credit facility at March 31, 2008. At the same date,
however, we had letters of credit outstanding of $1.7 million, which reduced our availability under
this facility to $98.3 million.
During the six months ended March 31, 2007, we sold 1.7 million shares of common stock to
the public. The $39.7 million in net proceeds from this offering were used to repurchase
approximately $36.2 million of our outstanding senior notes and to pay approximately $3.5 million
of associated premiums and expenses associated with the note repurchase.
Covenants related to our long-term debt restrict the payment of dividends and require the
maintenance of specific financial ratios and amounts and periodic financial reporting. The Company
was in compliance with all covenants in the instruments governing its outstanding debt at March 31,
2008.
At March 31, 2008, we guaranteed either all or a portion of the obligations 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 the hospitals or the physician investors.
We believe that internally generated cash flows and available borrowings under our senior
secured credit facility will be sufficient to finance our business plan, capital expenditures and
our working capital requirements for the next 12 to 18 months.
27
Intercompany Financing Arrangements
.
We provide secured real estate, equipment and
working capital financings to our majority-owned hospitals. The aggregate amount of the
intercompany real estate, equipment and working capital and other loans outstanding as of March 31,
2008 was $260.2 million.
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 6 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 fixed rates ranging from
7.38% to 8.58% or variable rates based on LIBOR plus an applicable margin. The weighted average
interest rate for the intercompany equipment loans at March 31, 2008 was 8.18%.
We typically receive a fee from the minority partners in the subsidiary hospitals as
consideration for providing these intercompany real estate and equipment loans.
We also use intercompany financing arrangements to provide cash support to individual
hospitals for their working capital and other corporate needs. We provide these working capital
loans pursuant to the terms of the operating agreements between our physician and hospital investor
partners and us at each of our hospitals. These intercompany loans are evidenced by promissory
notes that establish borrowing limits and provide for a market rate of interest to be paid to us on
outstanding balances. These intercompany loans are 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 typically 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. As of March 31, 2008 and September 30, 2007, we held $39.0 million and
$33.0 million, respectively, of intercompany working capital and other notes and related accrued
interest, net of advances from our hospitals.
Forward-Looking Statements
Some of the statements and matters discussed in this report and in exhibits to this
report constitute forward-looking statements. Words such as expects, anticipates,
approximates, believes, estimates, intends and hopes and variations of such words and
similar expressions are intended to identify such forward-looking statements. We have based these
statements on our current expectations and projections about future events. These forward-looking
statements are not guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in these statements. 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. Other than as may be required by federal securities laws to disclose material developments
related to previously disclosed information, 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, and the discussion of risk factors in
Item 1A. Risk Factors
in our Annual
Report on Form 10-K for the year ended September 30, 2007, before making an investment decision
with respect to our debt and 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. 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 second quarter of 2008.
See Item 7A in the Companys Annual Report on Form 10-K for further discussions about market risk.
Item 4. Controls and Procedures
The President and Chief Executive Officer and the interim Chief Financial Officer of the
Company (its principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation of the Companys disclosure controls and procedures as of
March 31, 2008, that the Companys disclosure controls and procedures were effective as of
March 31, 2008 to ensure that information required to be disclosed by the Company in the reports
filed or submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act),
is recorded, processed, summarized and reported within the time periods specified in the
28
SECs rules and forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files under the Exchange Act is
accumulated and communicated to the Companys management, including the Chief Executive Officer and
the interim Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
No change in the Companys internal control over financial reporting was made during the
most recent fiscal quarter covered by this report that materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
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 8
Contingencies and Commitments
to the
consolidated financial statements.
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, 2007. You should carefully consider these
risks and uncertainties before making an investment decision with respect to our debt and equity
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, 2007 or filings subsequently made with the Securities and Exchange Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 27, 2001, we completed an initial public offering of our common stock pursuant to
our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC
on July 23, 2001. We expect to use the remaining proceeds of approximately $13.8 million from the
offering to fund development activities, working capital requirements and other corporate purposes.
Although we have identified these intended uses of the remaining proceeds, we have broad discretion
in the allocation of the net proceeds from the offering. Pending this application, we will continue
to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds
or short-term interest bearing, investment-grade securities.
The Board of Directors approved a stock repurchase program of up to $59.0 million in
August 2007. Stock purchases can be made from time to time in the open market or in privately
negotiated transactions in accordance with applicable federal and state securities laws and
regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of
the stock repurchase program, the Company purchased 1,885,461 shares of common stock at a total
cost of $44.4 million.
The following table sets forth, for the months indicated, our purchases of common stock in the
second quarter of fiscal year 2008:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
Shares that
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
May Yet Be
|
|
|
Total Number
|
|
Average
|
|
Part of Publicly
|
|
Purchased Under
|
|
|
of Shares
|
|
Price Paid
|
|
Announced Plans
|
|
The Plans
|
Period
|
|
Purchased
|
|
per Share
|
|
or Programs
|
|
or Programs
|
|
|
(in thousands, except average price paid per share)
|
October 1, 2007 - October 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
59,000
|
|
November 1, 2007 - November 30, 2007
|
|
|
229
|
|
|
$
|
23.01
|
|
|
|
229
|
|
|
$
|
53,707
|
|
December 1, 2007 - December 31, 2007
|
|
|
548
|
|
|
$
|
23.70
|
|
|
|
548
|
|
|
$
|
40,695
|
|
January 1, 2008 - January 31, 2008
|
|
|
488
|
|
|
$
|
23.69
|
|
|
|
488
|
|
|
$
|
29,126
|
|
February 1, 2008 - February 29, 2008
|
|
|
620
|
|
|
$
|
23.38
|
|
|
|
620
|
|
|
$
|
14,598
|
|
March 1, 2008 - March 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
14,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885
|
|
|
$
|
23.51
|
|
|
|
1,885
|
|
|
$
|
14,598
|
|
29
Item 6. Exhibits
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MEDCATH CORPORATION
|
|
Dated: May 9, 2008
|
By:
|
/s/ O. EDWIN FRENCH
|
|
|
|
O. Edwin French
|
|
|
|
President and Chief Executive Officer
(principal executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ JAMES A. PARKER
|
|
|
|
James A. Parker
|
|
|
|
Interim Chief Financial Officer
(principal financial officer)
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ LORA RAMSEY
|
|
|
|
|
|
|
Lora Ramsey
|
|
|
|
|
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Vice President Controller
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(principal accounting officer)
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30
Medcath (NASDAQ:MDTH)
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Medcath (NASDAQ:MDTH)
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