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 June 30, 2009
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
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56-2248952
(IRS Employer Identification No.)
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incorporation or organization)
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10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)
(704) 815-7700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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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 August 4, 2009, there were 19,641,519 shares of $0.01 par value common stock outstanding.
MEDCATH CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
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June 30,
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September 30,
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2009
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2008
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Current assets:
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Cash and cash equivalents
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$
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42,857
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$
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93,836
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Restricted cash
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3,166
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3,154
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Accounts receivable, net
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76,205
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83,875
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Income tax receivable
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3,940
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3,091
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Medical supplies
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18,335
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15,479
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Deferred income tax assets
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7,600
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9,769
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Prepaid expenses and other current assets
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12,235
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9,796
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Current assets of discontinued operations
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10,052
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20,776
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Total current assets
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174,390
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239,776
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Property and equipment, net
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370,418
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323,729
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Investments in affiliates
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13,261
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15,285
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Goodwill
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60,174
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60,174
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Other intangible assets, net
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5,974
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6,063
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Other assets
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13,167
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8,378
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Long-term assets of discontinued operations
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51
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Total assets
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$
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637,384
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$
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653,456
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Current liabilities:
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Accounts payable
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$
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40,613
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$
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41,642
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Accrued compensation and benefits
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17,980
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16,872
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Other accrued liabilities
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25,793
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24,054
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Current portion of long-term debt and obligations
under capital leases
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19,133
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31,920
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Current liabilities of discontinued operations
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9,560
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10,184
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Total current liabilities
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113,079
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124,672
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Long-term debt
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104,683
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115,628
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Obligations under capital leases
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4,111
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2,087
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Deferred income tax liabilities
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12,267
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12,352
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Other long-term obligations
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6,882
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4,454
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Total liabilities
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241,022
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259,193
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Commitments and contingencies
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Minority interest in equity of consolidated subsidiaries
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18,737
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24,667
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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, $0.01 par value, 50,000,000 shares authorized;
21,691,780 issued and 19,737,419 outstanding at June 30, 2009
21,553,054 issued and 19,598,693 outstanding at September 30, 2008
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216
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216
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Paid-in capital
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455,346
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455,494
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Accumulated deficit
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(32,814
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)
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(41,138
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)
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Accumulated other comprehensive loss
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(326
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)
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(179
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)
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Treasury stock, at cost;
1,954,361 shares at June 30, 2009
1,954,361 shares at September 30, 2008
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(44,797
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)
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(44,797
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)
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Total stockholders equity
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377,625
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369,596
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Total liabilities and stockholders equity
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$
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637,384
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$
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653,456
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See notes to unaudited consolidated financial statements.
1
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended June 30,
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Nine Months Ended June 30,
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2009
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2008
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2009
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2008
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Net revenue
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$
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150,904
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$
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154,273
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$
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462,874
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$
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455,168
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Operating expenses:
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Personnel expense
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50,862
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50,520
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153,644
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150,060
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Medical supplies expense
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44,995
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42,757
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131,457
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123,155
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Bad debt expense
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12,547
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10,235
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34,558
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31,852
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Other operating expenses
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31,441
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29,555
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96,022
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88,996
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Pre-opening expenses
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754
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149
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1,340
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643
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Depreciation
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7,858
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7,505
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23,258
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22,535
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Amortization
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230
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149
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589
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411
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(Gain) loss on disposal of property, equipment
and other assets
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(26
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)
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225
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138
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391
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Total operating expenses
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148,661
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141,095
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441,006
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418,043
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Income from operations
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2,243
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13,178
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21,868
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37,125
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Other income (expenses):
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Interest expense
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(1,151
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)
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(3,862
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)
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(5,339
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)
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(11,658
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)
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Loss on early extinguishment of debt
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(6,702
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)
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Interest and other income
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52
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284
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218
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1,930
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Equity in net earnings of unconsolidated affiliates
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2,265
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2,636
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7,044
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6,842
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Total other income (expense), net
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1,166
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(942
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)
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(4,779
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)
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(2,886
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)
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Income from continuing operations before minority
interest and incomes taxes
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3,409
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12,236
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17,089
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34,239
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Minority interest share of earnings of consolidated
subsidiaries
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(2,287
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)
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(3,865
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)
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(9,703
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)
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(12,644
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)
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Income from continuing operations before income taxes
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1,122
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|
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8,371
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7,386
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21,595
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Income tax expense
|
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|
536
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|
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|
3,469
|
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2,998
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8,917
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|
|
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|
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Income from continuing operations
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|
586
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|
4,902
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4,388
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12,678
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(Loss) income from discontinued operations, net of taxes
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(90
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)
|
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6,870
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|
|
|
3,936
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|
|
|
7,843
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|
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Net income
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$
|
496
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$
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11,772
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$
|
8,324
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$
|
20,521
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|
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|
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|
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|
|
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|
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Earnings per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations
|
|
$
|
0.03
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
$
|
0.62
|
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Discontinued operations
|
|
|
|
|
|
|
0.35
|
|
|
|
0.20
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|
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0.38
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Earnings per share, basic
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|
$
|
0.03
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|
|
$
|
0.60
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|
$
|
0.42
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|
$
|
1.00
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|
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|
|
|
|
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|
|
|
|
|
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|
|
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|
|
|
|
|
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Earnings per share, diluted
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations
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|
$
|
0.03
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
$
|
0.62
|
|
Discontinued operations
|
|
|
|
|
|
|
0.35
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|
|
|
0.20
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Earnings per share, diluted
|
|
$
|
0.03
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|
|
$
|
0.60
|
|
|
$
|
0.42
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic
|
|
|
19,733
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|
|
|
19,524
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|
|
|
19,665
|
|
|
|
20,415
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
107
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|
|
|
56
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|
|
|
89
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
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|
19,733
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|
|
|
19,631
|
|
|
|
19,721
|
|
|
|
20,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Amount
|
|
|
Total
|
|
Balance, September 30, 2008
|
|
|
21,553
|
|
|
$
|
216
|
|
|
$
|
455,494
|
|
|
$
|
(41,138
|
)
|
|
$
|
(179
|
)
|
|
|
1,954
|
|
|
$
|
(44,797
|
)
|
|
$
|
369,596
|
|
Stock awards, including
income tax benefit
|
|
|
139
|
|
|
|
|
|
|
|
(2,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,216
|
)
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
2,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,068
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,324
|
|
Change in fair value of interest rate
swap, net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
|
21,692
|
|
|
$
|
216
|
|
|
$
|
455,346
|
|
|
$
|
(32,814
|
)
|
|
$
|
(326
|
)
|
|
|
1,954
|
|
|
$
|
(44,797
|
)
|
|
$
|
377,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements.
3
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Net income
|
|
$
|
8,324
|
|
|
$
|
20,521
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of taxes
|
|
|
(3,936
|
)
|
|
|
(7,843
|
)
|
Bad debt expense
|
|
|
34,558
|
|
|
|
31,852
|
|
Depreciation
|
|
|
23,258
|
|
|
|
22,535
|
|
Amortization
|
|
|
589
|
|
|
|
411
|
|
Excess income tax benefit on stock awards and options
|
|
|
|
|
|
|
(648
|
)
|
Loss on disposal of property, equipment and other assets
|
|
|
138
|
|
|
|
391
|
|
Share-based compensation expense
|
|
|
2,068
|
|
|
|
5,463
|
|
Loss on early extinguishment of debt
|
|
|
6,702
|
|
|
|
|
|
Amortization of loan acquisition costs
|
|
|
784
|
|
|
|
659
|
|
Equity in earnings of unconsolidated affiliates, net of distributions received
|
|
|
1,470
|
|
|
|
(536
|
)
|
Minority interest share of earnings of consolidated subsidiaries
|
|
|
9,703
|
|
|
|
12,644
|
|
Other
|
|
|
(34
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
58
|
|
|
|
(1,846
|
)
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26,888
|
)
|
|
|
(37,238
|
)
|
Medical supplies
|
|
|
(2,856
|
)
|
|
|
(1,737
|
)
|
Prepaids and other assets
|
|
|
(2,252
|
)
|
|
|
1,188
|
|
Accounts payable and accrued liabilities
|
|
|
3,040
|
|
|
|
(10,347
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations
|
|
|
54,726
|
|
|
|
35,469
|
|
Net cash (used in) provided by operating activities of discontinued operations
|
|
|
(1,205
|
)
|
|
|
521
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
53,521
|
|
|
|
35,990
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(72,399
|
)
|
|
|
(38,127
|
)
|
Proceeds from sale of property and equipment
|
|
|
856
|
|
|
|
358
|
|
Investments in affiliates
|
|
|
|
|
|
|
(9,532
|
)
|
Return of investment in affiliates
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(71,236
|
)
|
|
|
(47,301
|
)
|
Net cash provided by investing activities of discontinued operations
|
|
|
6,895
|
|
|
|
76,225
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(64,341
|
)
|
|
|
28,924
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
83,479
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(115,515
|
)
|
|
|
(2,144
|
)
|
Repayments of obligations under capital leases
|
|
|
(949
|
)
|
|
|
(1,024
|
)
|
Distributions to minority partners
|
|
|
(12,175
|
)
|
|
|
(14,813
|
)
|
Proceeds from exercised stock options
|
|
|
77
|
|
|
|
3,947
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
(44,403
|
)
|
Excess income tax benefit on stock awards and options
|
|
|
|
|
|
|
648
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations
|
|
|
(45,083
|
)
|
|
|
(57,789
|
)
|
Net cash used in financing activities of discontinued operations
|
|
|
(3,256
|
)
|
|
|
(14,745
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(48,339
|
)
|
|
|
(72,534
|
)
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(59,159
|
)
|
|
|
(7,620
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
112,068
|
|
|
|
145,385
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
52,909
|
|
|
$
|
137,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations
|
|
|
42,857
|
|
|
|
120,735
|
|
Cash and cash equivalents of discontinued operations
|
|
|
10,052
|
|
|
|
17,030
|
|
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 Basis of Presentation
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 June 30, 2009, the Company and its
physician partners have ownership interest in and operate nine hospitals in seven states with a
total of 755 licensed beds.
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.
The Company accounts for all but two of its owned and operated hospitals as consolidated
subsidiaries. The Company owns a minority interest in the Avera Heart Hospital of South Dakota and
Harlingen Medical Center as of June 30, 2009 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
method investment in accordance with Accounting Principles Board Opinion No. 18,
The Equity Method
of Accounting for Investments in Common Stock
, see Note 5.
Basis of Presentation
The Companys unaudited interim consolidated financial statements as
of June 30, 2009 and for the three and nine months ended June 30, 2009 and 2008 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 disclosures are adequate to make the information presented not
misleading. The unaudited interim consolidated financial statements and notes thereto should be
read in conjunction with the Companys audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2008.
During the nine months ended June 30, 2009, the Company has not made any material changes in the
selection or application of its critical accounting policies that were set forth in its Annual
Report on Form 10-K for the fiscal year ended September 30, 2008.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements:
Effective October 1, 2008 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 157,
Fair Value Measures
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for measuring fair value and enhances disclosures about fair value measures
required under other accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. In February 2008, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive
Accounting Pronouncements That Address Leasing Transactions
, and FSP FAS 157-2,
Effective Date of
FASB Statement No. 157
. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSP FAS
157-2 delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). In accordance with the provisions of FSP FAS
157-2 the Company has elected to defer implementation of SFAS 157 until October 1, 2010 as it
relates to the Companys non-financial assets and non-financial liabilities that are not permitted
or required to be measured at fair value on a recurring basis. The Company is evaluating the
impact, if any, SFAS 157 will have on those non-financial assets and liabilities. The adoption of
SFAS 157, in regard to financial assets and liabilities, did not have any impact on the Companys
consolidated balance sheets, results of operations or cash flows, as the Company did not have any
financial assets or liabilities that are required to be re-measured and reported at fair value as
of and for the nine months ended June 30, 2009.
Effective October 1, 2008 the Company adopted the provisions of Statements of Financial
Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to measure eligible items at fair value at
specified election dates and report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The Company has elected not
to apply the fair value option to any eligible items, as defined by SFAS 159.
5
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments
(FSP SFAS No. 107-1 and APB 28-1).
FSP SFAS No. 107-1 and APB 28-1, amend SFAS No. 107,
Disclosures about Fair Value of Financial
Instruments
and APB Opinion No. 28,
Interim Financial Reporting
to require disclosures of the fair
value of financial instruments in interim financial statements. See Note 6 for further disclosures.
Effective June 30, 2009 the Company adopted the provisions of Statements of Financial
Accounting Standards No. 165,
Subsequent Events
(SFAS 165). SFAS 165 establishes general
standards of accounting for and disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. In particular, SFAS No. 165
sets forth the following: (i) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial
statements; and (iii) the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. See Note 13 for further disclosures.
Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 115-2 and SFAS 124-2
Recognition and Presentation of Other-Than-Temporary Impairments
(FSP SFAS 115-2 and SFAS 124-2),
which modifies the existing other than temporary impairments (OTTI) model for investments in debt
securities. Under FSP SFAS 115-2 and SFAS 124-2, the primary change to the OTTI model for debt
securities is the change in focus from an entitys intent and ability to hold a security until
recovery. Instead, an OTTI is triggered if (1) an entity has the intent to sell the security, (2)
it is more likely than not that it will be required to sell the security before recovery, or (3) it
does not expect to recover the entire amortized cost basis of the security. In addition, FSP SFAS
115-2 and SFAS 124-2 changes the presentation of an OTTI in the income statement if the only reason
for recognition is a credit loss (i.e., an entity does not expect to recover its entire amortized
cost basis). The adoption of FSP SFAS 115-2 and SFAS 124-2 did not have an impact on the Companys
consolidated balance sheets, results of operations or cash flows.
Effective June 30, 2009 the Company adopted the provisions of FSP SFAS 157-4
Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly
(FSP SFAS 157-4), which provides
guidance on (1) estimating the fair value of an asset or liability (financial and nonfinancial)
when the volume and level of activity for the asset or liability have significantly decreased and
(2) identifying transactions that are not orderly. The adoption of FSP SFAS 157-4 did not have an
impact on the Companys consolidated balance sheets, results of operations or cash flows.
Recently Issued Accounting Pronouncements:
On June 12, 2009, the FASB issued Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No, 46(R)
(SFAS 167), which amends the consolidation guidance
that applies to variable interest entities (VIEs). The amendments will significantly affect the
overall consolidation analysis under FIN No. 46-R. The provisions of SFAS 167 revise the definition
and consideration of VIEs, primary beneficiary, and triggering events in which a company must
re-evaluate its conclusions as to the consolidation of an entity under the provisions of SFAS 167.
SFAS 167 is effective as of the beginning of the first fiscal year after November 15, 2009, fiscal
2011 for the Company. The Company is evaluating the potential impacts the adoption of SFAS 167 will
have on its consolidated financial statements.
On
June 29, 2009, the FASB issued Statement of Financial Accounting Standards No. 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162
(SFAS 168). The FASB Accounting Standards
Codification (the Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants, such as the Company. On the effective date of
SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature not included in the
Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The Company does not anticipate
the adoption of SFAS 168 will have a material impact on its consolidated financial statements.
3. Divestitures
During December 2008 the MedCath Partners Division of the Company sold its entire interest in
Cape Cod Cardiology Services, LLC (Cape Cod) for $6.9 million, resulting in a gain of $4.0
million, net of tax, which has been included in income from discontinued operations for the nine
months ended June 30, 2009.
During May 2008 the Hospital Division of the Company sold the net assets of Dayton Heart
Hospital (DHH). In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144) the Company has
classified the results of operations and the impacts from the collections and payments of the
remaining assets and liabilities associated with the facilities divested, as discontinued
operations for the three and nine months ended June 30, 2009 and 2008.
6
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The results of operations and the assets and liabilities of discontinued operations included
in the consolidated statements of income and consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net revenue
|
|
$
|
78
|
|
|
$
|
9,260
|
|
|
$
|
1,910
|
|
|
$
|
48,233
|
|
Gain from sale of Cape Cod
|
|
|
|
|
|
|
|
|
|
|
6,640
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(150
|
)
|
|
|
8,515
|
|
|
|
6,502
|
|
|
|
9,652
|
|
Income tax (benefit) expense
|
|
|
(60
|
)
|
|
|
1,645
|
|
|
|
2,566
|
|
|
|
1,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(90
|
)
|
|
$
|
6,870
|
|
|
$
|
3,936
|
|
|
$
|
7,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash and cash equivalents
|
|
$
|
10,052
|
|
|
$
|
18,232
|
|
Accounts receivable, net
|
|
|
|
|
|
|
1,856
|
|
Other current assets
|
|
|
|
|
|
|
688
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
$
|
10,052
|
|
|
$
|
20,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
Long-term assets of discontinued operations
|
|
$
|
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,559
|
|
|
$
|
9,467
|
|
Accrued liabilities
|
|
|
1
|
|
|
|
717
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
$
|
9,560
|
|
|
$
|
10,184
|
|
|
|
|
|
|
|
|
4. Accounts Receivable
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
150,604
|
|
|
$
|
131,915
|
|
Receivables, principally from billings to hospitals for various
cardiovascular procedures
|
|
|
1,131
|
|
|
|
2,608
|
|
Amounts due under management contracts
|
|
|
2,675
|
|
|
|
3,745
|
|
Other
|
|
|
5,540
|
|
|
|
3,463
|
|
|
|
|
|
|
|
|
|
|
|
159,950
|
|
|
|
141,731
|
|
Less allowance for doubtful accounts
|
|
|
(83,745
|
)
|
|
|
(57,856
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
76,205
|
|
|
$
|
83,875
|
|
|
|
|
|
|
|
|
5. Equity Investments
The Company owns minority interests in the 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 hospitals and other ventures as equity method
investments.
7
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The following represents summarized combined financial information of the Companys
unconsolidated affiliates accounted for under the equity method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net revenue
|
|
$
|
56,904
|
|
|
$
|
56,304
|
|
|
$
|
173,794
|
|
|
$
|
163,560
|
|
Income from operations
|
|
$
|
12,031
|
|
|
$
|
16,059
|
|
|
$
|
37,199
|
|
|
$
|
35,640
|
|
Net income
|
|
$
|
9,716
|
|
|
$
|
11,327
|
|
|
$
|
30,389
|
|
|
$
|
28,789
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
Current assets
|
|
$
|
62,139
|
|
|
$
|
70,921
|
|
Long-term assets
|
|
$
|
153,168
|
|
|
$
|
153,766
|
|
Current liabilities
|
|
$
|
30,589
|
|
|
$
|
28,958
|
|
Long-term liabilities
|
|
$
|
116,896
|
|
|
$
|
123,356
|
|
6. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Senior Notes
|
|
$
|
|
|
|
$
|
101,961
|
|
Senior Secured Credit Facility
|
|
|
80,000
|
|
|
|
|
|
Notes payable to various lenders
|
|
|
42,146
|
|
|
|
44,415
|
|
|
|
|
|
|
|
|
|
|
|
122,146
|
|
|
|
146,376
|
|
Less current portion
|
|
|
(17,463
|
)
|
|
|
(30,748
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
104,683
|
|
|
$
|
115,628
|
|
|
|
|
|
|
|
|
During November 2008, the Company amended and restated its senior secured credit
facility (the Senior Secured Credit Facility). The Senior Secured Credit Facility provides for a
three-year term loan facility in the amount of $75.0 million (the Term Loan) and a revolving
credit facility in the amount of $85.0 million (the Revolver), which includes a $25.0 million
sub-limit for the issuance of stand-by and commercial letters of credit and a $10.0 million
sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the
aggregate amount available under the Senior Secured Credit Facility may be increased by an amount
up to $50.0 million. Borrowings under the Senior Secured Credit Facility, excluding swing-line
loans, bear interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or
the alternate base rate plus the applicable margin. At June 30, 2009 the Term Loan bore interest at
3.32% and the Revolver bore interest at 2.82%.
The Senior Secured Credit Facility continues to be guaranteed jointly and severally by the
Company and certain of the Companys existing and future, direct and indirect, wholly owned
subsidiaries and continues to be secured by a first priority perfected security interest in all of
the capital stock or other ownership interests owned by the Company and subsidiary guarantors in
each of their subsidiaries, and, subject to certain exceptions in the credit facility, all other
present and future assets and properties of the Company and the subsidiary guarantors and all
intercompany notes.
The Senior Secured Credit Facility requires compliance with certain financial covenants
including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage
ratio test and a consolidated total leverage ratio test. The Senior Secured Credit Facility also
contains customary restrictions on, among other things, the Company and subsidiaries ability to
incur liens; engage in mergers, consolidations and sales of assets; incur debt; declare dividends;
redeem stock and repurchase, redeem and/or repay other debt; make loans, advances and investments
and acquisitions; and enter into transactions with affiliates.
The Senior Secured Credit Facility contains events of default, including cross-defaults to
certain indebtedness, change of control events, and other events of default customary for
syndicated commercial credit facilities. Upon the occurrence of an event of default, the Company
could be required to immediately repay all outstanding amounts under the amended credit facility.
8
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The Company is required to make mandatory prepayments of principal in specified amounts upon
the occurrence of certain events identified in the Senior Secured Credit Facility and is permitted
to make voluntary prepayments of principal under the Senior Secured Credit Facility. The Term Loan
is subject to amortization of principal in quarterly installments commencing on March 31, 2010. The
maturity date of both the Term Loan and the Revolver is November 10, 2011. The maximum
availability under the revolver is reduced by $5.0 million of outstanding borrowings and $3.5
million of outstanding letters of credit.
During December 2008 the Company redeemed its outstanding 9 7/8% senior notes (the Senior
Notes) issued by MedCath Holdings Corp., a wholly owned subsidiary of the Company, for $111.2
million, which included the payment of a repurchase premium of $5.0 million and accrued interest of
$4.2 million. The Senior Notes were redeemed through borrowings
under the Senior Secured Credit Facility and
available cash on hand. In addition to the aforementioned repurchase premium the Company incurred
$2.0 million in expense related to the write-off of previously incurred financing costs associated
with the Senior Notes. The repurchase premium and write off of previously incurred financing costs
have been included in the consolidated statement of income as loss on early extinguishment of debt.
Debt Covenants
At June 30, 2009, the Company was in violation of financial covenants under
equipment loans at Texsan Heart Hospital. Accordingly, the total outstanding balance of $6.8
million for these loans has been included in the current portion of long-term debt and obligations
under capital leases on the Companys consolidated balance sheet. The covenant violations did not
result in any other non-compliance related to the remaining covenants governing the Companys
outstanding debt; thereby the Company remained in compliance with all other covenants.
Fair Value of Financial Instruments
The Company considers the carrying amount of significant
classes of financial instruments on the consolidated balance sheets, including cash and cash
equivalents; accounts receivable, net, accounts payable; income taxes
payable; accrued liabilities;
variable rate long-term debt; obligations under capital leases; and other long-term obligations to
be reasonable estimates of fair value due either to their length to maturity or the existence of
variable interest rates underlying such financial instruments that approximate prevailing market
rates at June 30, 2009 and September 30, 2008. The estimated fair value of long-term debt,
including the current portion, at June 30, 2009 is approximately $40.0 million as compared to a
carrying value of approximately $42.1 million. At September 30, 2008, the estimated fair value of
long-term debt, including the current portion, was approximately $152.8 million as compared to a
carrying value of approximately $146.4 million. Fair value of the Companys fixed rate debt was
estimated using discontinued cash flow analyses, based on the Companys current incremental
borrowing rates for similar types of arrangements and market information. The fair value of the
Companys variable rate debt was determined to approximate its carrying value, due to the
underlying variable interest rates.
7. Contingencies and Commitments
Contingencies
The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings, court decisions,
executive orders and freezes and funding reductions, all of which may significantly affect the
Company. In addition, reimbursement is generally subject to adjustment following audit by third
party payors, including the fiscal intermediaries who administer the Medicare program, the Centers
for Medicare and Medicaid Services (CMS). Final determination of amounts due providers under the
Medicare program often takes several years because of such audits, as well as resulting provider
appeals and the application of technical reimbursement provisions. The Company believes that
adequate provisions have been made for any adjustments that might result from these programs;
however, due to the complexity of laws and regulations governing the Medicare and Medicaid
programs, the manner in which they are interpreted and the other complexities involved in
estimating net revenue, there is a possibility that recorded estimates will change by a material
amount in the future.
In 2005, CMS began using recovery audit contractors (RACs) to detect Medicare overpayments
not identified through existing claims review mechanisms. The RAC program relies on private
auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid
on a contingency basis. The RAC program began as a demonstration project in 2005 in three states
(New York, California and Florida) which was expanded into the three additional states of Arizona,
Massachusetts and South Carolina in July 2007. No RAC audits, however, were initiated at the
Companys Arizona or California hospitals during the demonstration project. The program was made
permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS announced in
March 2008 the end of the demonstration project and the commencement of the permanent program by
the expansion of the RAC program to additional states beginning in the summer and fall 2008 and its
plans to have RACs in place in all 50 states by 2010.
RACs perform post-discharge audits of medical records to identify Medicare overpayments
resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and
duplicate services. CMS has given RACs the authority to look back at claims up to three years old,
provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments
will be subject to the Medicare appeals process.
The Company believes the claims for reimbursement submitted to the Medicare program by the
Companys facilities have been accurate, however the Company is unable to reasonably estimate what
the potential result of future RAC audits or other reimbursement matters could be.
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 June 30, 2009. 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.
A joint venture in our MedCath Partners Division provides cardiac care services to a hospital
pursuant to a management and services agreement. The joint venture and the hospital disagreed
regarding the interpretation of certain provisions in the management and services agreement. During
August 2008 the two parties reached an agreement as to settlement, resulting in the Company
recording a liability of $0.7 million which is included within accrued liabilities in the
consolidated balance sheet at September 30, 2008. During November 2008 the entire settlement amount
was paid by the Company.
During the prior and current fiscal year, the Company refunded certain reimbursements to CMS
related to carotid artery stent procedures performed during prior fiscal years at two of the
Companys consolidated subsidiary hospitals. The U.S. Department of Justice (DOJ) initiated an
investigation related to the Companys return of these reimbursements. As a result of the DOJs
investigation, the Company began negotiating a settlement agreement during the third quarter of
fiscal 2009 with the DOJ whereby the Company is expected to pay approximately $0.8 million to
settle and obtain a release from any federal civil false claims liability related to DOJs
investigation. The DOJ allegations do not involve patient care, and relate solely to whether the
procedures were properly reimbursable by Medicare. The settlement would not include any finding of
wrong-doing or any admission of liability. As part of the settlement, the Company is also
negotiating with the Department of Health and Human Services, Office of Inspector General, (OIG),
to obtain a release from any federal health care program permissive exclusion actions to be
instituted by the OIG. As of June 30, 2009 Company accrued the $0.8 million within other accrued
liabilities on the consolidated balance sheet.
The Company has a one year claims-made policy providing coverage for medical malpractice claim
amounts in excess of $2.0 million of retained liability per claim. The Company additionally has
insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners division.
Due to the Companys self-insured retention levels, the Company is required to recognize an
estimated liability for the amount of retained liability applicable to each malpractice claim. As
of June 30, 2009 and September 30, 2008, 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 $5.4 million and $4.6 million, respectively, which is
included in other accrued liabilities in the consolidated balance sheets.
In addition to reserves for medical malpractice, the Company also maintains reserves for
self-insured workmans compensation, healthcare and dental coverage. The total estimated reserve
for self-insured liabilities for workmans compensation, employee health and dental claims was $3.2
million as of June 30, 2009 and September 30, 2008 which is included in other accrued liabilities
in the consolidated balance sheets. The Company maintains this reserve based on historical
experience with claims. The Company maintains commercial stop loss coverage for health and dental
insurance program of $175,000 per plan participant.
Commitments
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 other services, which
are accounted in accordance with Interpretation No. 45-3,
Application of FASB Interpretation No. 45
to Minimum Revenue Guarantees Granted to a Business or Its Owners
issued by the FASB. As of June
30, 2009, the maximum potential future payments that the Company could be required to make under
these guarantees were approximately $26.5 million through July 2012. At June 30, 2009 the Company
had a liability of $12.4 million for the fair value of these guarantees, of which $6.0 million is
in other accrued liabilities and $6.4 million is in other long term obligations. Additionally, the
Company had an asset of $12.3 million representing the future services to be provided by the
physicians, of which $5.9 million is in prepaid expenses and other current assets and $6.4 million
is in other assets.
8. Per Share Data
The calculation of diluted earnings per share considers the potential dilutive effect of
options to purchase 1,205,587 and 1,810,614 shares of common stock at prices ranging from $4.75 to
$33.05, which were outstanding at June 30, 2009 and 2008, respectively, as well as 487,335 and
145,430 shares of restricted stock which were outstanding at June 30, 2009 and 2008, respectively.
Of the outstanding stock options and restricted stock 1,692,922 and 1,501,000 have not been
included in the calculation of diluted earnings per share for the three months ended June 30, 2009
and 2008, respectively, and 1,637,260 and 786,000 have not been included in the calculation of
diluted earnings per share for the nine months ended June 30, 2009 and 2008, respectively, because
the stock options and restricted stock were anti-dilutive.
10
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
9. Stock Based Compensation
The Company accounts for stock-based compensation under the provisions of SFAS No. 123(R),
Share-Based Payment
(SFAS 123(R)). SFAS 123(R) established accounting for stock-based
awards exchanged for employee and certain nonemployee services. Accordingly, for employee awards,
equity classified stock-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the requisite service period. Stock based
compensation expense recorded during the three and nine months ended June 30, 2009 was $0.2 million
and $2.1 million, respectively. Tax benefits generated from stock based compensation expense was
$0.1 million and $0.8 million for the three and nine months ended June 30, 2009, respectively.
Stock based compensation expense recognized for the three and nine months ended June 30, 2008 was
$1.5 million and $5.5 million, respectively. Tax benefits generated from stock based compensation
expense was $0.6 million and $2.2 million for the three and nine months ended June 30, 2008,
respectively.
Stock Options
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Number of
|
|
Average
|
|
Number of
|
|
Average
|
|
|
Stock Options
|
|
Exercise Price
|
|
Stock Options
|
|
Exercise Price
|
Outstanding stock options, beginning of period
|
|
|
1,302,587
|
|
|
$
|
21.60
|
|
|
|
1,802,112
|
|
|
$
|
22.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
149,000
|
|
|
|
19.92
|
|
Exercised
|
|
|
(7,000
|
)
|
|
|
10.95
|
|
|
|
(72,748
|
)
|
|
|
12.79
|
|
Cancelled
|
|
|
(90,000
|
)
|
|
|
21.60
|
|
|
|
(67,750
|
)
|
|
|
26.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options, end of period
|
|
|
1,205,587
|
|
|
$
|
21.66
|
|
|
|
1,810,614
|
|
|
$
|
22.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Number of
|
|
Average
|
|
Number of
|
|
Average
|
|
|
Stock Options
|
|
Exercise Price
|
|
Stock Options
|
|
Exercise Price
|
Outstanding stock options, beginning of period
|
|
|
1,776,837
|
|
|
$
|
22.15
|
|
|
|
1,727,112
|
|
|
$
|
19.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
82,000
|
|
|
|
17.46
|
|
|
|
480,000
|
|
|
|
24.51
|
|
Exercised
|
|
|
(7,000
|
)
|
|
|
10.95
|
|
|
|
(252,748
|
)
|
|
|
20.16
|
|
Cancelled
|
|
|
(646,250
|
)
|
|
|
22.59
|
|
|
|
(143,750
|
)
|
|
|
27.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding stock options, end of period
|
|
|
1,205,587
|
|
|
$
|
21.66
|
|
|
|
1,810,614
|
|
|
$
|
22.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
During the three and nine months ended June 30, 2009, the Company granted to employees 96,725
and 520,878 shares of restricted stock, respectively. Restricted stock granted to employees, excluding
executives of the Company, vest in equal annual installments over a three year period. Executives
of the Company, defined by the Company as vice president or higher, received two separately equal
grants. The first grant of restricted stock vests in equal annual installments over a three year
period, the second grant of restricted stock vests over a three year period based on established
performance conditions. During the second quarter of this fiscal year, the Company granted 95,900
shares of restricted stock units to directors, which were fully vested at the date of grant but
have certain sales restrictions. Compensation expense, derived from the market price of the
Companys stock at the date of grant, less estimated forfeitures, is recognized on a straight-line
basis over the vesting period. At June 30, 2009 the Company had $2.8 million of unrecognized
compensation expense associated with restricted stock awards
.
11
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
The following table summarizes the Companys restricted stock award activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
Number of
|
|
Weighted-
|
|
Number of
|
|
Weighted-
|
|
|
Restricted
|
|
Average
|
|
Restricted
|
|
Average
|
|
|
Stock Units
|
|
Grant Price
|
|
Stock Units
|
|
Grant Price
|
Outstanding restricted stock units, beginning of period
|
|
|
559,116
|
|
|
$
|
9.74
|
|
|
|
154,508
|
|
|
$
|
19.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
96,725
|
|
|
|
9.42
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
(21,448
|
)
|
|
|
20.50
|
|
Cancelled
|
|
|
(72,606
|
)
|
|
|
9.40
|
|
|
|
(9,078
|
)
|
|
|
20.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock units, end of period
|
|
|
583,235
|
|
|
$
|
9.73
|
|
|
|
123,982
|
|
|
$
|
19.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
|
Number of
|
|
Weighted-
|
|
Number of
|
|
Weighted-
|
|
|
Restricted
|
|
Average
|
|
Restricted
|
|
Average
|
|
|
Stock Units
|
|
Grant Price
|
|
Stock Units
|
|
Grant Price
|
Outstanding restricted stock units, beginning of period
|
|
|
123,982
|
|
|
$
|
19.28
|
|
|
|
193,982
|
|
|
$
|
19.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
616,778
|
|
|
|
9.01
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(52,106
|
)
|
|
|
20.50
|
|
|
|
(21,448
|
)
|
|
|
20.50
|
|
Cancelled
|
|
|
(105,419
|
)
|
|
|
11.42
|
|
|
|
(48,552
|
)
|
|
|
20.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock units, end of period
|
|
|
583,235
|
|
|
$
|
9.73
|
|
|
|
123,982
|
|
|
$
|
19.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
10. 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 June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
143,399
|
|
|
$
|
145,663
|
|
|
$
|
439,635
|
|
|
$
|
428,876
|
|
MedCath Partners Division
|
|
|
7,398
|
|
|
|
8,040
|
|
|
|
22,931
|
|
|
|
24,484
|
|
Corporate and other
|
|
|
107
|
|
|
|
570
|
|
|
|
308
|
|
|
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
150,904
|
|
|
$
|
154,273
|
|
|
$
|
462,874
|
|
|
$
|
455,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
3,271
|
|
|
$
|
14,777
|
|
|
$
|
26,526
|
|
|
$
|
63,488
|
|
MedCath Partners Division
|
|
|
795
|
|
|
|
288
|
|
|
|
2,210
|
|
|
|
2,385
|
|
Corporate and other
|
|
|
(1,823
|
)
|
|
|
(1,887
|
)
|
|
|
(6,868
|
)
|
|
|
(28,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
2,243
|
|
|
$
|
13,178
|
|
|
$
|
21,868
|
|
|
$
|
37,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Aggregate identifiable assets:
|
|
|
|
|
|
|
|
|
Hospital Division
|
|
$
|
570,377
|
|
|
$
|
546,665
|
|
MedCath Partners Division
|
|
|
33,694
|
|
|
|
38,719
|
|
Corporate and other
|
|
|
33,313
|
|
|
|
68,072
|
|
|
|
|
|
|
|
|
Consolidated totals
|
|
$
|
637,384
|
|
|
$
|
653,456
|
|
|
|
|
|
|
|
|
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,
and other assets and operations of the business not subject to separate segment reporting.
11. Goodwill and Intangible Assets
Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible
and intangible assets. All of the Companys goodwill is recorded within the Hospital Division
segment. The Company evaluates goodwill annually on September 30 or earlier if indicators of
potential impairment exist. Due to market conditions during the first quarter of 2009 and the
related decline in the Companys market capitalization, the Company performed an interim impairment
test as of December 31, 2008. The results of this interim test indicated that no impairment existed
as of that date.
The determination of whether goodwill has become impaired involves a significant level of
judgment in the assumptions underlying the approach used to determine the fair value of the
Companys reporting unit. Changes in the Companys strategy, assumptions and/or market conditions
could significantly impact these judgments. Additionally, certain legislation is currently pending
which could potentially impact the Company. Management will continue to monitor market conditions
as well as pending legislation to determine if additional interim impairment tests are necessary in
future periods. If impairment indicators are determined to be present in such periods, the
resulting impairment charges could be material. There were no such indicators during the second or
third quarter of this current fiscal year.
13
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
12. Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net Income
|
|
$
|
496
|
|
|
$
|
11,772
|
|
|
$
|
8,324
|
|
|
$
|
20,521
|
|
Changes in fair value of interest rate swaps, net of tax benefit
|
|
|
126
|
|
|
|
146
|
|
|
|
(147
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
622
|
|
|
$
|
11,918
|
|
|
$
|
8,177
|
|
|
$
|
20,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Subsequent Events
The Company has evaluated events subsequent to June 30, 2009 through August 7, 2009, the date the
Company filed such unaudited consolidated financial statements on Form 10-Q with the SEC, and
determined that no material subsequent events have occurred.
14
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, 2008.
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 have ownership interests in and operate nine hospitals, with a total of 755 licensed
beds, of which 705 are staffed and available, and are located predominately in 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 completed our 79 bed expansion
at Louisiana Medical Center and Heart Hospital during May 2009, with remaining capacity for an
additional 40 beds at that hospital. We also have plans to expand our Bakersfield Heart Hospital by
72 inpatient beds and 16 emergency department beds that will diversify the services offered by that
hospital.
In addition to our hospitals, we currently own and/or manage 19 cardiac diagnostic and
therapeutic facilities. Twelve of these facilities are located at hospitals operated by other
parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The
remaining seven facilities are not located at hospitals and offer only diagnostic procedures.
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 June 30,
|
|
Nine Months Ended June 30,
|
Division
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Hospital
|
|
|
95.0
|
%
|
|
|
94.4
|
%
|
|
|
95.0
|
%
|
|
|
94.2
|
%
|
MedCath Partners
|
|
|
4.9
|
%
|
|
|
5.2
|
%
|
|
|
4.9
|
%
|
|
|
5.4
|
%
|
Corporate and other
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
|
|
0.1
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
patients directly. 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 admitting payor in the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
Payor
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Medicare
|
|
|
49.7
|
%
|
|
|
51.2
|
%
|
|
|
51.9
|
%
|
|
|
52.0
|
%
|
Medicaid
|
|
|
1.9
|
%
|
|
|
2.8
|
%
|
|
|
3.0
|
%
|
|
|
3.1
|
%
|
Commercial and other, including self-pay
|
|
|
48.4
|
%
|
|
|
46.0
|
%
|
|
|
45.1
|
%
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, i.e. the 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 future.
15
In 2005, CMS began using RACs to detect Medicare overpayments not identified through existing
claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare
claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC
program began as a demonstration project in 2005 in three states (New York, California and Florida)
which was expanded into the three additional states of Arizona, Massachusetts and South Carolina in
July 2007. No RAC audits, however, were initiated at our Arizona or California hospitals during the
demonstration project. The program was made permanent by the Tax Relief and Health Care Act of 2006
enacted in December 2006. CMS announced in March 2008 the end of the demonstration project and the
commencement of the permanent program by the expansion of the RAC program to additional states
beginning in the summer and fall 2008 and its plans to have RACs in place in all 50 states by 2010.
RACs perform post-discharge audits of medical records to identify Medicare overpayments
resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and
duplicate services. CMS has given RACs the authority to look back at claims up to three years old,
provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments
will be subject to the Medicare appeals process.
Even though the Company believes the claims for reimbursement submitted to the Medicare
program by the Companys facilities have been accurate, the Company is unable to reasonably
estimate what the potential result of future RAC audits or other reimbursement matters could be.
Results of Operations
Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
Statement of Operations Data
.
The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
|
% of Net Revenue
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
Net revenue
|
|
$
|
150,904
|
|
|
$
|
154,273
|
|
|
$
|
(3,369
|
)
|
|
|
(2.2
|
)%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
50,862
|
|
|
|
50,520
|
|
|
|
342
|
|
|
|
0.7
|
%
|
|
|
33.7
|
%
|
|
|
32.8
|
%
|
Medical supplies expense
|
|
|
44,995
|
|
|
|
42,757
|
|
|
|
2,238
|
|
|
|
5.2
|
%
|
|
|
29.8
|
%
|
|
|
27.7
|
%
|
Bad debt expense
|
|
|
12,547
|
|
|
|
10,235
|
|
|
|
2,312
|
|
|
|
22.6
|
%
|
|
|
8.3
|
%
|
|
|
6.6
|
%
|
Other operating expenses
|
|
|
31,441
|
|
|
|
29,555
|
|
|
|
1,886
|
|
|
|
6.4
|
%
|
|
|
20.8
|
%
|
|
|
19.2
|
%
|
Pre-opening expenses
|
|
|
754
|
|
|
|
149
|
|
|
|
605
|
|
|
|
406.0
|
%
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
Depreciation
|
|
|
7,858
|
|
|
|
7,505
|
|
|
|
353
|
|
|
|
4.7
|
%
|
|
|
5.2
|
%
|
|
|
4.9
|
%
|
Amortization
|
|
|
230
|
|
|
|
149
|
|
|
|
81
|
|
|
|
54.4
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
(Gain) loss on disposal of property, equipment
and other assets
|
|
|
(26
|
)
|
|
|
225
|
|
|
|
(251
|
)
|
|
|
111.6
|
%
|
|
|
(0.0
|
)%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,243
|
|
|
|
13,178
|
|
|
|
(10,935
|
)
|
|
|
(83.0
|
)%
|
|
|
1.5
|
%
|
|
|
8.5
|
%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,151
|
)
|
|
|
(3,862
|
)
|
|
|
2,711
|
|
|
|
70.2
|
%
|
|
|
(0.8
|
)%
|
|
|
(2.5
|
)%
|
Interest and other income, net
|
|
|
52
|
|
|
|
284
|
|
|
|
(232
|
)
|
|
|
(81.7
|
)%
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
2,265
|
|
|
|
2,636
|
|
|
|
(371
|
)
|
|
|
(14.1
|
)%
|
|
|
1.5
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority
interest, income taxes and discontinued operations
|
|
|
3,409
|
|
|
|
12,236
|
|
|
|
(8,827
|
)
|
|
|
(72.1
|
)%
|
|
|
2.2
|
%
|
|
|
7.9
|
%
|
Minority interest share of earnings of consolidated
subsidiaries
|
|
|
(2,287
|
)
|
|
|
(3,865
|
)
|
|
|
1,578
|
|
|
|
40.8
|
%
|
|
|
(1.5
|
)%
|
|
|
(2.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
and discontinued operations
|
|
|
1,122
|
|
|
|
8,371
|
|
|
|
(7,249
|
)
|
|
|
(86.6
|
)%
|
|
|
0.7
|
%
|
|
|
5.4
|
%
|
Income tax expense
|
|
|
536
|
|
|
|
3,469
|
|
|
|
(2,933
|
)
|
|
|
(84.5
|
)%
|
|
|
0.3
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
586
|
|
|
|
4,902
|
|
|
|
(4,316
|
)
|
|
|
(88.0
|
)%
|
|
|
0.4
|
%
|
|
|
3.2
|
%
|
(Loss) income from discontinued operations, net of taxes
|
|
|
(90
|
)
|
|
|
6,870
|
|
|
|
(6,960
|
)
|
|
|
(101.3
|
)%
|
|
|
(0.1
|
)%
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
496
|
|
|
$
|
11,772
|
|
|
$
|
(11,276
|
)
|
|
|
(95.8
|
)%
|
|
|
0.3
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2009
|
|
2008%
|
|
Change
|
Selected Operating Data (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
Licensed beds (b)
|
|
|
588
|
|
|
|
449
|
|
|
|
|
|
Staffed and available beds (c)
|
|
|
542
|
|
|
|
449
|
|
|
|
|
|
Admissions (d)
|
|
|
6,352
|
|
|
|
7,384
|
|
|
|
(14.0
|
)%
|
Adjusted admissions (e)
|
|
|
10,284
|
|
|
|
10,341
|
|
|
|
(0.6
|
)%
|
Patient days (f)
|
|
|
25,482
|
|
|
|
27,132
|
|
|
|
(6.1
|
)%
|
Adjusted patient days (g)
|
|
|
41,174
|
|
|
|
38,105
|
|
|
|
8.1
|
%
|
Average length of stay (days) (h)
|
|
|
4.01
|
|
|
|
3.67
|
|
|
|
9.3
|
%
|
Occupancy (i)
|
|
|
51.7
|
%
|
|
|
66.4
|
%
|
|
|
|
|
Inpatient catheterization procedures (j)
|
|
|
3,071
|
|
|
|
3,961
|
|
|
|
(22.5
|
)%
|
Inpatient surgical procedures (k)
|
|
|
2,045
|
|
|
|
2,260
|
|
|
|
(9.5
|
)%
|
Hospital net revenue (in thousands except percentages)
|
|
$
|
141,665
|
|
|
$
|
144,676
|
|
|
|
(2.1
|
)%
|
|
|
|
(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.
|
|
(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)
|
|
Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals
catheterization labs during the period.
|
|
(k)
|
|
Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.
|
Net Revenue.
Our consolidated net revenue decreased 2.2% or $3.4 million to $150.9 million for
the third quarter of fiscal 2009 from $154.3 million for the third quarter of fiscal 2008. Hospital
Division net revenue decreased 2.1%, or $3.0 million, for the third quarter of fiscal 2009 compared
to the same period of fiscal 2008, in addition to declines in our MedCath Partners division and
Corporate and other.
Over the past several quarters, our hospitals have experienced a shift in patient clinical
setting from inpatient to outpatient as the result of advancement in medical technologies and at
the direction of certain of our payors. Total inpatient net revenue was 66% of the Hospital
Divisions total net patient revenue for the third quarter of fiscal 2009 compared to approximately
74% for the third quarter of fiscal 2008.
Inpatient Hospital division net revenue decreased 13% in the third quarter of fiscal 2009
compared to the third quarter of fiscal 2008 and admissions declined 14% from 7,384 to 6,352.
Inpatient net revenue declined for all of our core cardiovascular procedures with the exception of
open heart procedures, which increased $0.9 million for the third quarter of fiscal 2009 compared
to the third quarter of fiscal 2008. The overall decline in net patient revenue from our core
cardiovascular procedures was partially offset by inpatient net revenue increases for new services
performed at our hospitals such as digestive procedures.
Outpatient Hospital division net revenue increased 26% in the third quarter of fiscal 2009
compared to the third quarter of fiscal 2008 and outpatient cases increased 13.1% from 16,183 to
18,302. Outpatient net revenue increased for all service lines with the exception of angioplasty
procedures.
Total net patient revenue related to drug eluting stent procedures and bare metal stent
procedures, regardless of clinical setting, decreased $1.4 million, or 5.2%, for the third quarter
of fiscal 2009 compared to the same quarter of fiscal 2008.
17
Net revenue for the third quarter of fiscal 2008 included charity care deductions of $4.2
million compared to charity care deductions of $1.0 million for fiscal 2009. The reduction is the
result of fewer patients applying and qualifying for charity discounts during the third quarter of
fiscal 2009 compared to the same period of the prior year.
Net revenue for the third quarter of fiscal 2009 was reduced by $3.1 million as a result of a
reduction in the estimated amount of Medicare Disproportionate Share Hospital (DSH) payments
certain hospitals are eligible for in prior periods. The primary method for a hospital to qualify
for Medicare DSH reimbursement is based on a statutory formula that utilizes the percentage of
inpatient days attributable to patients eligible for Medicaid, but not eligible for Medicare Part
A, and a base formula called the Supplemental Security Income (SSI) percentage, which is released
annually by the CMS. Based on the updated SSI percentage provided by CMS during June, 2009, we
determined that four hospitals that we previously determined were eligible for DSH payments in
fiscal 2007 and fiscal 2008 would either no longer be eligible for such payments or would be
eligible for less payment than initially estimated.
Personnel expense.
Personnel expense increased 0.7% to $50.9 million for the third quarter of
fiscal 2009 from $50.5 million for the third quarter of fiscal 2008. The $0.4 million increase in
personnel expense was due primarily to annual merit increases and a corresponding increase in
benefits offset by a $1.3 million reduction in stock compensation expense. Stock based compensation
expense was $0.2 million for the third quarter of fiscal 2009 compared to $1.5 million for the
third quarter of fiscal 2008. The stock based compensation expense for the third quarter of fiscal
2009 was recorded based on a vesting schedule related to the issuance of restricted shares to
certain employees which vest over a three year period or vest 50% over a three year period and 50%
over the same three year period if certain performance criteria are satisfied. The stock based
compensation expense for the third quarter of fiscal 2008 was based on the issuance of stock
options which vested immediately.
Medical supplies expense.
Medical supplies expense increased 5.2% to $45.0 million for the
third quarter of fiscal 2009 from $42.8 million for the third quarter of fiscal 2008. The $2.2
million increase in medical supplies is a result of a 4.1% increase in open heart cases, a 32.1%
increase in musculoskeletal cases and a 42.6% increase in the usage of drug eluting stents offset
by a 20.6% decrease in the usage of bare metal stents. In addition,
our average length of stay
increased 9.3%, which resulted in a 11.3% increase in non-chargeable supply expense.
Bad debt expense.
Bad debt expense increased 22.6% to $12.5 million for the third quarter of
fiscal 2009 from $10.2 million for the third quarter of fiscal 2008. As a percentage of net
revenue, bad debt expense increased to 8.3% for the third quarter of fiscal 2009 as compared to
6.6% for the comparable period of fiscal 2008. Our total uncompensated care
including charity care and bad debt expense was 9.5% of total net patient hospital revenue for the
third quarter of fiscal 2009 compared to 9.6% of total net patient revenue for the third quarter of
fiscal 2008. The total number of patients which applied and qualified for charity care reduced
during third quarter of fiscal 2009 compared to the third quarter of fiscal 2008. We reported $3.2
million more charity deductions to net revenue during the third quarter of fiscal 2008 when
compared to the third quarter of fiscal 2009.
Other operating expenses.
Other operating expenses increased 6.4% to $31.4 million for the
third quarter of fiscal 2009 from $29.6 million for the third quarter of fiscal 2008. The increase
is attributable to the following:
|
|
|
$1.1 million increase in professional fees associated with an internal assessment of
certain controls and procedures completed during the quarter.
|
|
|
|
$0.8 million increase in penalty expense for the anticipated settlement of regulatory
claims at two of our hospitals related to the identification, return and self-reporting of
$0.7 million in reimbursement for certain procedures performed at those hospitals in prior
fiscal years.
|
|
|
|
$0.4 million increase in severance payments.
|
The above increases were offset by a decrease in our medical malpractice insurance expense of $0.6
million for the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008.
Interest expense.
Interest expense decreased $2.7 million or 70.2% to $1.2 million for the
third quarter of fiscal 2009 from $3.9 million for the third quarter of fiscal 2008. The $2.7
million decrease in interest expense is primarily attributable to the overall reduction in our
outstanding debt, interest rates on our outstanding debt, and the capitalization of interest on our
capital expansion projects. Capitalized interest was $0.8 million for the third quarter of fiscal
2009 compared to $0.4 million for the third quarter of fiscal 2008.
Interest and other income.
Interest and other income decreased to $0.1 million for
the third quarter of fiscal 2009 from $0.3 million for the third quarter of fiscal 2008. The
decrease in interest and other income is a direct result of the approximately $77.9 million
decrease in our cash and cash equivalent balance from June 30, 2008 to June 30, 2009, which
resulted in a reduction in interest earned on cash balances.
Minority interest share of earnings of consolidated subsidiaries.
Minority interest share of
earnings of consolidated subsidiaries decreased to $2.3 million for the first three months of
fiscal 2009 from $3.9 million for the comparable period of fiscal 2008. 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, 2008.
18
Income tax expense.
Income tax expense was $0.5 million for the third quarter of
fiscal 2009 compared to $3.5 million for the third quarter of fiscal 2008, which represents an
effective tax rate of approximately 47.8% and 41.4% for the respective periods. The 47.8% rate for
the third quarter of fiscal 2009 is the effective rate created due to permanent, non-recurring
items during the reporting period. The income tax rate for the third quarter of fiscal 2008 was
negatively impacted by the write-off goodwill based on the valuation of one of our hospitals we
subsequently sold. The write-off of goodwill is a non-deductible tax expense in the period the
write-off occurs.
(Loss) income from discontinued operations, net of taxes.
(Loss) income from discontinued
operations, net of taxes, reflects the results of Dayton Heart Hospital, Cape Cod Cardiology, and
the Heart Hospital of Lafayette for the third quarter of fiscal 2009 and fiscal 2008.
Income from discontinued operations decreased to a loss of $0.1 million, net of tax, for the third
quarter of fiscal 2009 from income of $6.9 million, net of tax, for the comparable period of fiscal
2008. Loss from discontinued operations during the third quarter of fiscal 2009 related to
continued payments of liabilities associated with the divested facilities, whereas the income from
discontinued operations from same quarter of fiscal 2008 was related to operating income from Cape
Cod Cardiology offset by losses at Dayton Heart Hospital.
Nine months ended June 30, 2009 Compared to Nine Months Ended June 30, 2008
Statement of Operations Data
.
The following table presents our results of operations in
dollars and as a percentage of net revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
|
(in thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Increase/Decrease
|
|
|
% of Net Revenue
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
2009
|
|
|
2008
|
|
Net revenue
|
|
$
|
462,874
|
|
|
$
|
455,168
|
|
|
$
|
7,706
|
|
|
|
1.7
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
153,644
|
|
|
|
150,060
|
|
|
|
3,584
|
|
|
|
2.4
|
%
|
|
|
33.2
|
%
|
|
|
33.0
|
%
|
Medical supplies expense
|
|
|
131,457
|
|
|
|
123,155
|
|
|
|
8,302
|
|
|
|
6.7
|
%
|
|
|
28.4
|
%
|
|
|
27.0
|
%
|
Bad debt expense
|
|
|
34,558
|
|
|
|
31,852
|
|
|
|
2,706
|
|
|
|
8.5
|
%
|
|
|
7.5
|
%
|
|
|
7.0
|
%
|
Other operating expenses
|
|
|
96,022
|
|
|
|
88,996
|
|
|
|
7,026
|
|
|
|
7.9
|
%
|
|
|
20.8
|
%
|
|
|
19.5
|
%
|
Pre-opening expenses
|
|
|
1,340
|
|
|
|
643
|
|
|
|
697
|
|
|
|
108.4
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
Depreciation
|
|
|
23,258
|
|
|
|
22,535
|
|
|
|
723
|
|
|
|
3.2
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Amortization
|
|
|
589
|
|
|
|
411
|
|
|
|
178
|
|
|
|
43.3
|
%
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
Loss on disposal of property, equipment and other
assets
|
|
|
138
|
|
|
|
391
|
|
|
|
(253
|
)
|
|
|
64.7
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
21,868
|
|
|
|
37,125
|
|
|
|
(15,257
|
)
|
|
|
(41.1
|
)%
|
|
|
4.7
|
%
|
|
|
8.2
|
%
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5,339
|
)
|
|
|
(11,658
|
)
|
|
|
6,319
|
|
|
|
54.2
|
%
|
|
|
(1.1
|
)%
|
|
|
(2.6
|
)%
|
Loss on early extinguishment of debt
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
(100.0
|
)%
|
|
|
(1.4
|
)%
|
|
|
|
|
Interest and other income, net
|
|
|
218
|
|
|
|
1,930
|
|
|
|
(1,712
|
)
|
|
|
(88.7
|
)%
|
|
|
|
|
|
|
0.4
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,044
|
|
|
|
6,842
|
|
|
|
202
|
|
|
|
3.0
|
%
|
|
|
1.5
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority
interest, income taxes and discontinued operations
|
|
|
17,089
|
|
|
|
34,239
|
|
|
|
(17,150
|
)
|
|
|
(50.1
|
)%
|
|
|
3.7
|
%
|
|
|
7.5
|
%
|
Minority interest share of earnings of consolidated
subsidiaries
|
|
|
(9,703
|
)
|
|
|
(12,644
|
)
|
|
|
2,941
|
|
|
|
23.3
|
%
|
|
|
(2.1
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income
taxes and discontinued operations
|
|
|
7,386
|
|
|
|
21,595
|
|
|
|
(14,209
|
)
|
|
|
(65.8
|
)%
|
|
|
1.6
|
%
|
|
|
4.7
|
%
|
Income tax expense
|
|
|
2,998
|
|
|
|
8,917
|
|
|
|
(5,919
|
)
|
|
|
(66.4
|
)%
|
|
|
0.7
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,388
|
|
|
|
12,678
|
|
|
|
(8,290
|
)
|
|
|
(65.4
|
)%
|
|
|
0.9
|
%
|
|
|
2.8
|
%
|
Income from discontinued operations, net of taxes
|
|
|
3,936
|
|
|
|
7,843
|
|
|
|
(3,907
|
)
|
|
|
49.8
|
%
|
|
|
0.9
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,324
|
|
|
$
|
20,521
|
|
|
|
(12,197
|
)
|
|
|
(59.4
|
)%
|
|
|
1.8
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30,
|
|
|
2009
|
|
2008%
|
|
%Change
|
Selected Operating Data (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
Licensed beds ( b )
|
|
|
588
|
|
|
|
449
|
|
|
|
|
|
Staffed and available beds ( c )
|
|
|
542
|
|
|
|
449
|
|
|
|
|
|
Admissions ( d )
|
|
|
20,152
|
|
|
|
22,380
|
|
|
|
(10.0
|
)%
|
Adjusted admissions ( e )
|
|
|
30,714
|
|
|
|
30,979
|
|
|
|
(0.9
|
)%
|
Patient days ( f )
|
|
|
78,681
|
|
|
|
81,853
|
|
|
|
(3.9
|
)%
|
Adjusted patient days ( g )
|
|
|
120,106
|
|
|
|
113,790
|
|
|
|
5.6
|
%
|
Average length of stay (days) ( h )
|
|
|
3.90
|
|
|
|
3.66
|
|
|
|
6.6
|
%
|
Occupancy ( i )
|
|
|
53.2
|
%
|
|
|
66.5
|
%
|
|
|
|
|
Inpatients with a catheterization procedure (j)
|
|
|
10,069
|
|
|
|
12,244
|
|
|
|
(17.8
|
)%
|
Inpatient surgical procedures (k)
|
|
|
6,133
|
|
|
|
6,332
|
|
|
|
(3.1
|
)%
|
Hospital net revenue (in thousands except percentages)
|
|
$
|
436,457
|
|
|
$
|
426,300
|
|
|
|
2.4
|
%
|
|
|
|
(a)
|
|
Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing
operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in
our consolidated financial statements.
|
|
(b)
|
|
Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether
the beds are actually available for patient use.
|
|
(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)
|
|
Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals
catheterization labs during the period.
|
|
(k)
|
|
Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.
|
Net Revenue.
Our consolidated net revenue increased 1.7% or $7.7 million to $462.9 million for
the first nine months ended June 30, 2009 from $455.2 million for the nine months ended June 30, 2008.
Hospital Division net revenue increased 2.4% for the first nine months of fiscal 2009 compared to
the same period of fiscal 2008 offset by a decline in our MedCath Partners Division and Corporate
and other.
We continue to experience a shift from inpatient to outpatient services as a result of certain
of our payors requiring catheterization procedures to be performed on an outpatient basis. Our
outpatient business continued to grow with the outpatient cases up 11.5% from
46,132 for the first nine months of fiscal 2008 to 51,452 for the first nine months of fiscal 2009.
Our Hospital division outpatient net revenue increased 28.9% during the first nine months of
fiscal 2009 compared to the same period of fiscal 2008. We experienced an increase in outpatient
revenue for all outpatient services with the exception of percutanerous transluminal coronary
angioplasty (PTCA or angioplasty) procedures. Non-drug eluting and drug-eluting stent outpatient
revenue increased $4.2 and $8.5 million, respectively for the first nine months of fiscal 2009
compared to the first nine months of fiscal 2008. Electrophysiology net outpatient revenue
increased 35.6%, or $8.8 million.
Inpatient Hospital division net revenue decreased 6.5% during the first nine months of fiscal
2009 compared to the same period of fiscal 2008. The majority of our core inpatient procedures
experienced a decline in net patient revenue as a result in the shift to providing services in an
outpatient setting; however, we experienced a $4.3 million increase in our Hospital Division
inpatient net revenue related to open heart procedures. Inpatient drug-eluting stent and non-drug
eluting stent net revenue were down $1.0 million and
$13.2 million, respectively for the first nine
months of fiscal 2009 as compared the same period of fiscal 2008.
20
Our net revenue was favorably impacted by lower uncompensated care discounts, or charity care
discounts, which are recorded as a reduction to gross revenue. The decrease in uncompensated care
discounts reflects a decrease in the number of patients applying and qualifying for charity
discounts. Charity care discounts were $3.8 million for the first nine months of fiscal 2009
compared to $11.4 million for the same period of fiscal 2008.
During the third quarter of fiscal 2009, net revenue was reduced by $3.1 million as a result
of a reduction in the estimated amount of DSH payments certain hospitals are eligible for in prior
periods. The primary method for a hospital to qualify for Medicare DSH reimbursement is based on a
statutory formula that utilizes the percentage of inpatient days attributable to patients eligible
for Medicaid, but not eligible for Medicare Part A, and a base formula called the SSI percentage,
which is released annually by the CMS. Based on the updated SSI percentage provided by CMS during
June, 2009, we determined that four hospitals that we previously determined were eligible for DSH
payments in fiscal 2007 and fiscal 2008 would either no longer be eligible for such payments or
would be eligible for less payment than initially estimated.
Personnel expense.
Personnel expense increased 2.4% to $153.6 million for the first nine
months of fiscal 2009 from $150.1 million for the comparable period of fiscal 2008. The $3.5
million increase in personnel expense was due to the increase in clinical labor to support the
increase in adjusted admissions and annual merit increases offset by a reduction in stock based
compensation expense. Stock based compensation expense was $2.1 million for the first nine months
of fiscal 2009 compared to $5.5 million for the same period of fiscal 2008. The stock based
compensation expense recorded for the first nine months of fiscal 2009 is primarily based on a
vesting schedule related to the issuance of restricted shares to certain employees which vest over
a three year period or vest 50% over a three year period and 50% over the same three year period if
certain performance criteria are satisfied. The stock based compensation expense for the
comparable period of fiscal 2008 was based on the issuance of stock options which vested
immediately.
Medical supplies expense.
Medical supplies expense increased 6.7% to $131.5 million for the
first nine months of fiscal 2009 from $123.2 million for the comparable period of fiscal 2008. The
$8.3 million increase in medical supplies is a result of an
increase in heart, drug eluting and non drug eluting stent cases for
the first nine months of fiscal 2009 compared to the first nine
months of fiscal 2008 as well as an increase in pharmacy costs
related to a higher average length of stay for the first nine months of
fiscal 2009 compared to the same period of fiscal 2008. As length of stay increases, the chargeable
supplies and pharmacy costs increase accordingly.
Bad debt expense.
Bad debt expense increased 8.5% to $34.6 million for the first nine months
ended June 30, 2009 from $31.9 million for the comparable period of fiscal 2008. As a percentage of
net revenue, bad debt expense increased to 7.5% for the first nine months of fiscal 2009 as
compared to 7.0% for the comparable period of fiscal 2008. Total uncompensated care, which we
define as bad debt expense plus charity care discounts, was 8.8% and 7.4% of net revenue for the
first nine months of fiscal 2009 and 2008, respectively. The increase is the result of an overall
increase in self-pay revenue.
Other operating expenses.
Other operating expenses increased 7.9% to $96.0 million for the
first nine months of fiscal 2009 from $89.0 million for the comparable period of fiscal 2008. In
addition, the increase is the result of the following items recorded during the third quarter of
fiscal 2009:
|
|
|
$1.1 million increase in professional fees associated with an internal assessment of
certain controls and procedures completed during the quarter.
|
|
|
|
$0.8 million increase in penalty expense for the anticipated settlement of regulatory
claims at two of our hospitals related to the identification, return and self-reporting of
$0.7 million in reimbursement for certain procedures performed at those hospitals in prior
fiscal years.
|
|
|
|
$0.4 million increase in severance expense payments.
|
In addition to the above items, the increase is attributable to a $4.1 million increase in costs
related to clinical and nonclinical purchased contract services, a $0.6 million increase in
emergency department physician fees as a result of a 13.2% increase in emergency department visits,
an increase in lab contract fees and $0.9 million increase in costs related to the start-up of a
new primary care group at one of our hospitals and a $1.2 million increase in medical malpractice
claim expense, the majority of which is attributable to one claim which settled during the third
quarter of fiscal 2009.
The above increases were offset by a decline in our medical benefits expense of $1.3 million.
Interest expense.
Interest expense decreased $6.3 million or 54.2% to $5.3 million for the
first nine months of fiscal 2009 from $11.6 million for the comparable period of fiscal 2008. The
$6.3 million decrease in interest expense is primarily attributable to the overall reduction in our
outstanding debt, reduction in interest rates on our outstanding debt, and the capitalization of
interest on our capital expansion projects. Capitalized interest was $2.3 million for the first
nine months of fiscal 2009 compared to $0.6 million for the same period of fiscal 2008.
Loss on early extinguishment of debt.
During December 2008, we redeemed all of our outstanding
9 7/8% Senior Notes for $111.2 million, which included the payment of a repurchase premium of $5.0
million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings
under the Senior Secured Credit Facility and available cash on hand. In addition, we incurred $2.0
million in expenses related to the write-off of previously incurred financing costs associated with
the Senior Notes.
21
Interest and other income.
Interest and other income decreased to $0.2 million for
the first nine months of fiscal 2009 from $1.9 million for the comparable period of fiscal 2008.
The decrease in interest and other income is a direct result of the approximately $77.9 million
decrease in our cash and cash equivalents balance from June 30, 2008 to June 30, 2009 which
resulted in a reduction in interest earned on those cash balances. Our cash balance decreased
primarily as a result of the repurchase of our 9 7/8% Senior Notes during December 2008.
Minority interest share of earnings of consolidated subsidiaries.
Minority interest share of
earnings of consolidated subsidiaries decreased to $9.7 million for the first nine months of fiscal
2009 from $12.6 million for the comparable period of fiscal 2008. This $2.9 million decrease was
primarily due to the overall net decrease in income before minority interest of certain of our
established hospitals. We expect our earnings allocated to minority interests to fluctuate in
future periods as we either recognize disproportionate losses and/or recoveries thereof through
disproportionate profit recognition. 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, 2008.
Income tax expense.
Income tax expense was $3.0 million for the first nine months of fiscal
2009 compared to $8.9 million for the comparable period of fiscal 2008, which represents an
effective tax rate of approximately 40.6% and 41.3% for the respective periods
.
The lower
effective tax rate for the first nine months of fiscal 2009 as compared to the same period of
fiscal 2008 was a result of a decrease in non-deductible expenses for tax purposes primarily
compensation expense associated with incentive stock option grants and the write-off of goodwill.
Income from discontinued operations, net of taxes.
Income from discontinued operations, net of
taxes, reflects the results of Dayton Heart Hospital, Cape Cod Cardiology, and the Heart Hospital
of Lafayette for the first nine months of fiscal 2009 and 2008. Income from discontinued operations
decreased to $3.9 million, net of tax, for the first nine months of fiscal 2009 from $7.8 million,
net of tax, for the comparable period of fiscal 2008. The first nine months of fiscal 2008 includes
the gain recorded as a result of the sale of certain assets of Dayton Heart Hospital and income
from the operations of Cape Cod offset by a loss from operations of Dayton Heart Hospital; where as
the first nine months of fiscal 2009 primarily includes the gain recorded as a result of the sale
of Cape Cod and income from the operations of Cape Cod, offset by continued expenses related to
Dayton Heart Hospital.
Liquidity and Capital Resources
Working Capital and Cash Flow Activities
. Our consolidated working capital was $61.3 million
at June 30, 2009 and $115.1 million at September 30, 2008. Consolidated working capital decreased
primarily as a result of our repayment of the 9 7/8% Senior Notes in December 2008, as discussed in
Note 6 to the consolidated financial statements in this report.
At June 30, 2009
,
$3.2 million of cash was restricted and held in escrow as required by the
city of Kingman, Arizona in conjunction with the Companys development of the Hualapai Mountain
Medical Center. The escrowed funds are to be released upon our completion of common infrastructure
construction projects affecting the city of Kingman. We anticipate the completion of the related
projects and release of escrowed funds during late 2009 or early 2010.
At June 30, 2009, we continue to carry a reserve of $9.5 million for outlier payments received
in 2004, which is recorded in current liabilities of discontinued operations.
The cash provided by continuing operations from operating activities was $54.7 million for the
first nine months of fiscal 2009 compared to $35.5 million for the comparable period of fiscal
2008. The increase in cash provided by continuing operations is primarily a result of cash used
from continuing operations during the first quarter 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 in November 2007 as a result of an
investigation of a clinical trial conducted at one of our hospitals. Our collections on accounts
receivable increased during the first nine months of fiscal 2009 compared to the first nine months
of fiscal 2008 which had a positive impact on our cash flow from operations.
Our investing activities from continuing operations used net cash of $71.2 million for the
first nine months of fiscal 2009 compared to $47.3 million for the comparable period of fiscal
2008. The total cash used for capital expenditures increased by $34.3 million during the first nine
months of fiscal 2009 as compared to fiscal 2008, primarily as a result of the expansion of our
hospital facilities and the construction of the new acute care hospital in Kingman, Arizona.
Our financing activities from continuing operations used net cash of $45.1 million for the
first nine months of fiscal 2009 compared to $57.8 million for the comparable period of fiscal
2008. Cash used in financing activities decreased by $12.7 million for the first nine months of
fiscal 2009 as compared to the comparable period of fiscal 2008. The overall decrease was due to
the purchase of treasury stock during the first nine months of fiscal 2008 offset by an increase in
cash used to pay long-term debt and capital leases of $30.0 million for the first nine months of
fiscal 2009 as compared to the comparable period of fiscal 2008, primarily due to the repayment of
the 9 7/8% Senior Notes during December 2008. The repayment included a $5.0 million repurchase
premium as discussed within Note 6 to the consolidated financial statements.
Capital Expenditures.
Cash paid for property and equipment was $72.4 million and $38.1 million
for the first nine months of fiscal years 2009 and 2008, respectively. During the first nine months
ended June 30, 2009, we continued to develop our hospital in Kingman, Arizona and various expansion
projects at 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.
22
Obligations and Availability of Financing.
At June 30, 2009, we had $127.9 million of
outstanding debt, $19.1 million of which was classified as current. Of the outstanding debt, $80.0
million was outstanding under our Senior Secured Credit Facility. See Note 6 to the consolidated
financial statements in this report. $47.7 million was outstanding to various lenders to our
hospitals, and the remaining $0.2 million of debt was outstanding to lenders for MedCath Partners
diagnostic services under capital leases and other miscellaneous indebtedness. Of the $80.0 million
outstanding under our Senior Secured Credit Facility, $5.0 million was outstanding under the
Revolver. The maximum availability under the Revolver is $85.0 million which is reduced by the
aforementioned outstanding borrowings under the Revolver and outstanding letters of credit totaling
$3.5 million.
Covenants related to our long-term debt restrict the payment of dividends and require the
maintenance of specific financial ratios and amounts and periodic financial reporting. At June 30,
2009 TexSan Heart Hospital was in violation of financial covenants which govern its equipment loans
outstanding. Accordingly, the total outstanding balance of $6.8 million for these loans has been
included in the current portion of long-term debt and obligations under capital leases on the
Companys consolidated balance sheet. The covenant violations did not result in any other
non-compliance related to the remaining covenants governing the Companys outstanding debt; thereby
the Company remained in compliance with all other covenants.
At June 30, 2009, 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 at least the next 12 to 18 months. See Note 6 to the
consolidated financial statements in this report.
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 June 30, 2009 was $295.2
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 2 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
4.87% to 8.58% or variable rates based on LIBOR plus an applicable margin. The weighted average
interest rate for the intercompany equipment loans at June 30, 2009 was 7.77%.
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 sweep cash from certain 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 June
30, 2009 and September 30, 2008, we held $31.7 million and $19.8 million, respectively, of
intercompany working capital and other notes and related accrued interest, net of advances from our
hospitals.
Disclosure About Critical Accounting Policies
Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended
September 30, 2008. During the first nine months of fiscal 2009 we adopted new accounting policies
as discussed in Note 2
Recent Accounting Pronouncements
to the consolidated financial
statements. The adoption of these new accounting policies did not have a material impact on our
consolidated balance sheets, statements of operations or cash flows.
Goodwill represents acquisition costs in excess of the fair value of net identifiable tangible
and intangible assets and all of the companys goodwill is recorded within the Hospital Division
segment. The company evaluates goodwill annually on September 30 or earlier if indicators of
potential impairment exist. Due to market conditions during the first quarter of 2009 and the
related decline in the companys market capitalization, the company performed an interim impairment
test as of December 31, 2008. The results of this interim test indicated that no impairment existed
as of that date.
23
The determination of whether goodwill has become impaired involves a significant level of
judgment in the assumptions underlying the approach used to determine the value of the Companys
reporting unit. Changes in the Companys strategy, assumptions and/or market conditions could
significantly impact these judgments. Additionally, certain legislation is currently pending which
could potentially impact the Company. Management will continue to monitor market conditions as well
as the pending legislation to determine if additional interim impairment tests are necessary in
future periods. If impairment indicators are determined to be present in such periods, the
resulting impairment charges could be material. There were no such indicators during the second or
third quarters of this current fiscal year.
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. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. We urge you to review carefully all of the information in
this report and our other filings with the SEC, including the discussion of risk factors in
Item
1A. Risk Factors
in this report and our Annual Report on Form 10-K for the year ended September 30,
2008, 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 first nine months of 2009. See
Item 7A in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2008
for further discussions about market risk.
Interest Rate Risk
Our Senior Secured Credit Facility borrowings expose us to risks caused by fluctuations in the
underlying interest rates. The total outstanding balance of our Senior Secured Credit Facility was
$80.0 million at June 30, 2009. A change of 100 basis points in the underlying interest rate would
have caused a change in interest expense of approximately $0.5 million during the nine month period
ended June 30, 2009.
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 June
30, 2009, that the Companys disclosure controls and procedures were effective as of June 30, 2009
to ensure that information required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended (the Exchange Act), is
recorded, processed, summarized and reported in a timely manner, and includes controls and
procedures designed to ensure that information required to be disclosed by the Company in the
reports that it files under the Exchange Act is accumulated and communicated to the Companys
management, including the Chief Executive Officer and the Interim Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are occasionally involved in legal proceedings and other claims arising out of our
operations in the normal course of business. See Note 7
Contingencies and Commitments
to the
consolidated financial statements.
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, 2008. 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.
24
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,
2008 or filings subsequently made with the Securities and Exchange Commission except for the
addition of the following risk factors:
Declines in the market price of our common stock or changes in other circumstances that may
indicate an impairment of goodwill could adversely affect our financial position and results of
operations.
It is possible that a change in circumstances such as the decline in the market price of our
common stock or in the numerous variables associated with the judgments, assumptions and estimates
made in assessing the appropriate valuation of our goodwill, could negatively impact the valuation
and create the potential for a non-cash charge to recognize impairment losses on some or all of our
goodwill. If we were required to write down a portion of our goodwill and record related non-cash
impairment charges, our financial position and results of operations could be adversely affected.
Medicare Recovery Audit Contractor
As
discussed in Part I, Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations, herein, the outcome of future RAC audits may have a material adverse effect
on our business, financial position, results of operations, or cash flows.
The above risks and other risks described in our other filings with the SEC could have a
material impact on our business, financial position, results of
operations or cash flows. It is not possible
to predict or identify all risk factors. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also impair our operations. Therefore, the
risks identified are not intended to be a complete discussion of all potential risks or
uncertainties.
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, which was announced November 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 has purchased 1,885,461 shares of
common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be
repurchased per the approved stock repurchase program. No shares were repurchased during the nine
month period ended June 30, 2009.
See Note 6 to our annual financial statements in our Annual Report on Form 10-K for the year
ended September 30, 2008 for a description of restrictions on payments of dividends.
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
|
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
MEDCATH CORPORATION
|
|
Dated: August 7, 2009
|
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,
Senior Vice President, Finance and Development
(principal financial officer)
|
|
|
|
|
|
|
By:
|
/s/ LORA RAMSEY
|
|
|
|
Lora Ramsey
|
|
|
|
Vice President and Controller
(principal accounting officer)
|
|
|
INDEX TO EXHIBITS
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
26
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