UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 33-85458
MEDCATH INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1635096
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226
(Address of principal executive officers)
(Zip Code)
(704) 541-3228
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 X No_____
As of August 14, 1996, there were 11,120,149 Common Shares outstanding.
<PAGE>
MEDCATH INCORPORATED
FORM 10-Q
June 30, 1996
Table of Contents
Page
No.
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed consolidated financial statements
Condensed consolidated statements of income 3
Condensed consolidated balance sheets 4
Condensed consolidated statements of cash flows 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's discussion and analysis of
financial condition and results of operations 9-13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Income
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------------------------------------------------
1995 1996 1995 1996
--------------- ----------------- --------------------------------
<S> <C> <C> <C> <C>
Revenue $ 10,367,815 $ 18,375,810 $ 30,423,579 $ 46,868,372
Operating expenses:
Medical supplies and other 3,660,292 7,155,778 11,035,548 18,158,849
Personnel costs 2,205,577 5,585,120 6,665,213 12,709,330
Depreciation 751,480 1,301,140 2,268,064 3,139,930
Amortization 169,750 639,379 546,558 1,392,706
Provision for doubtful accounts - 181,021 - 313,696
Marketing, general and administrative 1,452,570 1,245,898 3,356,798 3,869,925
--------------- ----------------- -------------- ---------------
Total operating expenses 8,239,669 16,108,336 23,872,181 39,584,436
Income from operations 2,128,146 2,267,474 6,551,398 7,283,936
Interest expense (171,403) (719,281) (785,389) (1,449,236)
Interest income 290,722 708,555 601,502 962,609
Minority interests in earnings of consolidated entities (393,188) (326,588) (1,155,838) (718,762)
Equity in net earnings of unconsolidated joint venture 27,205 23,693 76,667 89,644
--------------- ----------------- --------------- --------------
Income before income taxes and extraordinary item 1,881,482 1,953,853 5,288,340 6,168,191
Provision for income taxes (745,950) (781,541) (2,086,962) (2,467,276)
--------------- ----------------- --------------- --------------
Income before extraordinary item 1,135,532 1,172,312 3,201,378 3,700,915
Extraordinary loss on early extinguishment of debt
(net of applicable income tax benefit of $139,700) - - (227,951) -
--------------- ----------------- --------------- --------------
Net income $ 1,135,532 $ 1,172,312 $ 2,973,427 $ 3,700,915
=============== ================= =============== ==============
Net income per share:
Income before extraordinary item $ 0.13 $ 0.10 $ 0.39 $ 0.38
Extraordinary loss - - (0.03) -
=============== ================= =============== ==============
Net income $ 0.13 $ 0.10 $ 0.36 $ 0.38
=============== ================= =============== ==============
Weighted average number of common and common
equivalent shares outstanding 8,844,832 11,330,391 8,210,180 9,814,686
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Condensed Consolidated Balance Sheets
September 30, June 30,
1995 1996
---------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,821,728 $ 5,457,694
Short-term investments 11,703,019 58,399,706
Accounts receivable, net of allowance 4,086,146 10,885,263
Medical supplies 365,191 1,264,518
Deferred income taxes 205,000 205,000
Prepaid expenses and other current assets 221,579 1,067,798
---------------- ---------------
Total current assets 23,402,663 77,279,979
Property and equipment, net of accumulated depreciation 29,468,644 57,019,382
Other assets 1,347,215 1,739,015
Start-up and organizational costs, net of accumulated amortization 2,489,156 6,901,523
Loans to affiliates 3,370,236 4,856,744
Intangible assets, net of accumulated amortization 18,293,782 19,512,337
---------------- ---------------
Total assets $ 78,371,696 $ 167,308,980
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 947,569 $ 1,840,999
Distribution payable to minority interests 811,484 11,396
Accrued liabilities 2,139,873 3,414,880
Income taxes payable 125,694 70,905
Current portion of obligations under capital leases 1,612,165 -
Current portion of long-term debt 526,402 1,808,099
---------------- ---------------
Total current liabilities 6,163,187 7,146,279
Deferred income taxes 2,113,800 2,450,000
Long-term debt 13,317,861 34,764,493
Obligations under capital leases 2,415,733 -
---------------- ---------------
Total liabilities 24,010,581 44,360,772
Minority interests in equity of consolidated entities 3,866,823 4,222,312
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, 8,684,543 shares
issued and outstanding at September 30, 1995
and 11,120,149 issued and outstanding at June 30, 1996 86,845 111,202
Preferred stock, $.01 par value, 2,000,000 shares authorized, none
issued or outstanding at September 30,1995 and June 30, 1996 - -
Unrealized losses on short-term investments - (8,843)
Paid-in capital 44,373,923 108,889,098
Retained earnings 6,033,524 9,734,439
---------------- ---------------
Total shareholders' equity 50,494,292 118,725,896
---------------- ---------------
Total liabilities, minority interests and shareholders' equity $ 78,371,696 $ 167,308,980
================ ===============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30,
--------------------------------------
1995 1996
------------------ -----------------
<S> <C> <C>
Operating activities
Net income before extraordinary item $ 3,201,378 $ 3,700,915
Adjustments to reconcile net income before extraordinary item
to net cash provided by operating activities:
Depreciation and amortization 2,899,637 4,628,788
Provision for doubtful accounts - 313,696
Equity in net earnings of unconsolidated joint venture (76,667) (89,644)
Current tax benefit of extraordinary loss 139,700 -
Gain on sale of property and equipment - (25,482)
Deferred income taxes - 336,200
Pro forma tax provision of pooled entity 211,962 -
Unrealized loss on short-term investments - (8,843)
(Increase) decrease in current assets:
Accounts receivable (1,674,991) (6,438,771)
Medical supplies 110,213 (869,912)
Prepaid expenses and other current assets 71,722 (846,219)
Increase (decrease) in current liabilities:
Accounts payable (450,197) 893,430
Distribution payable to minority interests 281,299 (800,088)
Income taxes payable (507,967) (54,789)
Accrued liabilities 603,419 891,007
Increase in other assets (245,019) (207,930)
------------------ -----------------
Net cash provided by operating activities 4,564,489 1,422,358
Investing activities
Purchases of property and equipment (9,467,773) (31,257,313)
Proceeds from sale of property and equipment - 790,800
Additional investment in business (654,800) -
Start-up and organizational costs (872,173) (5,292,784)
Loans and advances to affiliates (2,857,610) (1,801,971)
Repayments of loans and advances to affiliates - 315,463
Net purchases of short-term investments (13,493,000) (46,696,687)
------------------ -----------------
Net cash used in investing activities (27,345,356) (83,942,492)
Financing activities
Repayments of obligations under capital leases (1,189,869) (4,193,534)
Proceeds from issuance of long-term debt 9,026,323 28,558,535
Repayments of long-term debt (10,205,517) (5,830,206)
Repayments of subordinated debt (4,225,000) -
Investments by minority partners 300,000 355,489
Distributions to shareholders of pooled entity (318,385) -
Proceeds from issuance of common stock 29,107,344 62,639,532
Payment of loan acquisition costs and deferred loan fees (472,402) (373,716)
------------------ -----------------
Net cash provided by financing activities 22,022,494 81,156,100
------------------ -----------------
Net decrease in cash and equivalents (758,373) (1,364,034)
Adjustment for the effect on cash flows of pooled
entity's different fiscal year 195,701 -
Cash and cash equivalents, beginning of period 3,465,805 6,821,728
------------------ -----------------
Cash and cash equivalents, end of period $ 2,903,133 $ 5,457,694
================== =================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three and Nine Month Periods Ended June 30, 1996
Note 1- General
The accompanying unaudited condensed consolidated financial statements of
MedCath Incorporated ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the statements for the unaudited interim periods
include all adjustments necessary for fair presentation of results for the
periods and all such adjustments are of a normal recurring nature. The
accompanying unaudited condensed consolidated results of operations for the
three and nine month periods ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending September 30, 1996. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1995. Unless otherwise specified, capitalized terms
used herein are used as defined in the Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note 2 - Net Income Per Share
The computation of primary and fully diluted net income per share is based upon
the weighted average number of common and common equivalent shares, if dilutive,
outstanding during the period. The computation of fully diluted net income per
share also takes into consideration the use of market price at the end of the
period, when higher than the average market price for the period. Common stock
equivalents represent the dilutive effect of the exercise of all outstanding
stock options. Fully diluted net income per share is not presented because it
does not differ from primary net income per share.
Note 3 - Long-Term Debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
September 30, June 30,
1995 1996
--------------------------------------
<S> <C> <C>
The Revolver $ 100 $ -
McAllen REIT Loan (as defined below) 12,467,339 13,750,000
Arkansas REIT Loan (as defined below) - 11,330,270
Installment notes payable to equipment lenders - 10,874,246
Other notes payable 1,376,824 618,076
--------------------------------------
13,844,263 36,572,592
Less current portion (526,402) (1,808,099)
======================================
$ 13,317,861 $ 34,764,493
======================================
</TABLE>
6
<PAGE>
Note 3 - Long - Term Debt (continued)
On January 31, 1996, the Company's Credit Agreement was amended to increase the
maximum amount available under the Revolver from $11 million to $20 million. The
computed amount available as of June 30, 1996 (the "Borrowing Base") was
approximately $17.9 million. The Company may elect to borrow funds with an
applicable interest rate based on prime (as defined by the lender) or the 30,
60, or 90 day London Interbank Offered Rate ("LIBOR"). The interest rate on
prime-based borrowings can range from prime to prime plus 1/2% and interest is
payable quarterly. The interest rate on LIBOR-based loans can range from LIBOR
plus 1.15% to LIBOR plus 1.8% and interest is payable as the 30, 60, or 90 day
loans mature. The prime and LIBOR-based interest rates vary based on the
Company's attainment of certain financial objectives. On January 31, 1998, the
amount outstanding under the Revolver converts to a term loan, payable in 16
equal quarterly installments beginning on March 31, 1998 and continuing through
December 31, 2001. The commitment fee on the unused portion of the Revolver is
1/4% per annum.
In August 1994, the McAllen Partnership entered into a construction and term
loan agreement with a real estate investment trust ("REIT") for the purpose of
financing the land acquisition and construction costs of the McAllen Heart
Hospital (the "McAllen REIT Loan"). In December 1995, the total amount
outstanding of $13.75 million under the McAllen REIT Loan converted to a
seven-year term loan, and beginning on February 1, 1998 and continuing through
January 1, 2003, becomes due in monthly installments using a 25-year
amortization schedule with a balloon payment due on February 1, 2003. Interest
is payable monthly on the outstanding borrowings. As of June 30, 1996, the
interest rate was 10.19% and will increase by 22 basis points per year beginning
February 1, 1997.
In December 1995, the Company entered into a construction and term loan
agreement with a REIT for the purpose of financing the land acquisition and
construction costs of the Arkansas Heart Hospital (the "Arkansas REIT Loan").
The Arkansas REIT Loan provides for maximum borrowings of $27 million and
converts to a seven-year term loan upon completion of the Arkansas Heart
Hospital. As of June 30, 1996, the interest rate on the Arkansas REIT Loan was
10.90%, which represents a designated bank's base rate plus 2 1/2%. Upon
completion of construction, the interest rate changes to 4 1/2% above a rate
index tied to seven-year U.S. Treasury Notes, and subsequently increases by 22
basis points per year. Interest is payable monthly on the outstanding
borrowings.
The Credit Agreement, McAllen REIT Loan and the Arkansas REIT Loan contain
certain restrictive covenants which prohibit the payment of dividends and
require the maintenance of specific financial ratios and amounts. The Company
was in compliance with these covenants as of June 30, 1996.
In 1995, the Company obtained financing of up to $12 million in installment
notes payable to equipment lenders for the purpose of purchasing equipment for
the McAllen Heart Hospital. Amounts borrowed under these notes are payable in
monthly installments of principal and interest over five to seven-year terms.
Interest is at fixed rates, determined at the closing date of the respective
notes, and ranges from 8.54% to 10%.
Note 4 - Acquisitions and New Operations
In February 1996, the Company acquired MedCath Physician Management of Virginia,
Inc. ("MPMV"), a newly formed management services organization. In connection
with this acquisition, the Company issued common stock valued at $1.9 million
for assets with a fair value of $2.3 million and assumed liabilities of
$400,000. MPMV has a 40-year contract to manage Mid-Atlantic Medical
Specialists, Inc. ("Mid-Atlantic"), a 12 physician practice, which includes two
cardiologists, located in southwest Virginia.
7
<PAGE>
Note 4 - Acquisitions and New Operations (continued)
In April 1996, the Company announced it has formed a venture for the purpose of
constructing and operating the Austin Heart Hospital to be located in Austin,
Texas. The Company anticipates the total cost of the Austin Heart Hospital will
be approximately $28 million. The Company expects to begin construction on the
Austin Heart Hospital in fiscal 1997 and to open the Austin Heart Hospital in
fiscal 1998.
Note 5 - Capitalization
In April 1996, the Company completed a public offering of 2.3 million shares of
its common stock. Gross and net proceeds from the offering were $66.1 and $62.5
million respectively. A portion of the proceeds was used to repay $5.0 million
outstanding under the Revolver and $3.3 million was used to retire obligations
under capital leases. The remainder of the proceeds will be used to fund (i) a
portion of the construction and start-up costs of the Arkansas, Tucson and
Austin Heart Hospitals and the development of new heart hospitals and Fixed-Site
Facilities, (ii) potential future acquisitions, (iii) working capital and (iv)
general corporate purposes.
8
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and Results of
Operations For the Three and Nine Month Periods Ended June 30, 1996
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements and accompanying notes. All References to a "Note" are to
the "Notes to Unaudited Condensed Consolidated Financial Statements" contained
herein. Unless otherwise specified, capitalized terms used herein are used as
defined in the Company's Annual Report on Form 10-K for the year ended September
30, 1995 and all references to the three and nine month periods refer to the
respective periods ended June 30, 1995 and 1996.
Acquisitions and New Operations
In January 1996, the Company opened its first heart hospital, the McAllen Heart
Hospital, located in McAllen, Texas. The Company currently has three additional
heart hospitals under development, two of which are expected to open in fiscal
1997 and the third in fiscal 1998.
In February 1996, the Company acquired MPMV, a newly-formed management services
organization, which under a 40-year agreement manages Mid-Atlantic, a 12
physician practice that includes two cardiologists, located in southwest
Virginia. This is the second physician practice to which the Company provides
management services.
In April 1996, the Company announced it has formed a venture for the purpose of
constructing and operating the Austin Heart Hospital to be located in Austin,
Texas. The Company anticipates the total cost of the Austin Heart Hospital will
be approximately $28 million. The Company expects to open the Austin Heart
Hospital in fiscal 1998.
Results of Operations
The following table sets forth, for the periods presented, the percentage of the
Company's revenue represented by certain items reflected in the Unaudited
Condensed Consolidated Statements of Income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------------------------
1995 1996 1995 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Medical supplies and other 35.3 38.9 36.3 38.7
Personnel costs 21.3 30.4 21.9 27.1
Depreciation and amortization 8.9 10.6 9.3 9.7
Provision for doubtful accounts - 1.0 - .7
Marketing, general and administrative 14.0 6.8 11.0 8.3
------------------------------------------------------
Total operating expenses 79.5 87.7 78.5 84.5
------------------------------------------------------
Income from operations 20.5 12.3 21.5 15.5
Interest expense (1.7) (3.9) (2.6) (3.1)
Interest income 2.8 3.9 2.0 2.1
Minority interests in earnings of consolidated entites (3.8) (1.8) (3.8) (1.5)
Equity in net income of unconsolidated joint venture .3 .1 .3 .2
------------------------------------------------------
Income before income taxes and extraordinary item 18.1 10.6 17.4 13.2
Provision for income taxes (7.1) (4.2) (6.9) (5.3)
------------------------------------------------------
Income before extraordinary item 11.0 6.4 10.5 7.9
Extraordinary loss - - (.7) -
======================================================
Net income 11.0% 6.4% 9.8% 7.9%
======================================================
</TABLE>
9
<PAGE>
Results of Operations (continued)
Revenue
Revenue for the three months ended June 30, 1995 and 1996 was $10.4 million and
$18.4 million, respectively, an increase of $8.0 million, or 77.2%. Revenue for
the nine months ended June 30, 1995 and 1996 was $30.4 million and $46.9
million, respectively, an increase of $16.5 million, or 54.1%.
The majority of the increase in total revenue for the three and nine month
periods ended June 30, 1996 was attributable to patient revenues at the McAllen
Heart Hospital, which opened in January 1996. The net revenues from the McAllen
Heart Hospital were $5.6 million and $9.8 million, for the three and nine month
ended June 30, 1996, respectively, representing 70.0% and 59.7% of the total
revenue increases for the three and nine month periods. Revenues from the
Physician Practice Management division increased for the three and nine month
periods due to (i) an increase in revenue from the contract to manage AMC, which
is the result of increased patient volumes and an increase in the number of
physicians practicing at AMC and (ii) the revenues from the recently
acquired contract to manage Mid-Atlantic. Since October 1, 1994, the number of
physicians under management in the Physician Practice Management division has
grown from 45 to 66. The Diagnostics division, which consists of Fixed-Site
Facility management and the operation of Mobile Cath Labs, experienced record
revenues of $8.7 million and $26.3 million for the three and nine month periods
ended June 30, 1996. Revenues from the management of Fixed-Site Facilities
increased during the three and nine month periods due to higher patient volumes
at the Tucson lab, the Kingman lab and the Sun City Cardiac Center. Revenues
from Mobile Cath Labs increased during the three and nine month periods due to
an increase in patient volumes and also due to an increase in the number of
Mobile Cath Labs operated by the Company, from 21 in 1995 to 23 in 1996.
Total Operating Expenses
Total operating expenses were $8.2 million and $16.1 million for the three
months ended June 30, 1995 and 1996, respectively, an increase of $7.9 million,
or 95.5%. Total operating expenses were $23.9 million and $39.6 million for the
nine months ended June 30, 1995 and 1996, respectively, an increase of $15.7
million, or 65.8%.
Medical supplies and other, and personnel costs make up the largest portion of
these increases with a 117.2% increase over the same three month period ended
June 30, 1995 and a 74.2% increase over the same nine month period ended June
30, 1995. Over 90% of the increases in medical supplies and other, and personnel
costs for the three and nine month periods ending June 30, 1996 were
attributable to the opening of the McAllen Heart Hospital, the acquisition of
MPMV and the increase in patient volumes and physicians practicing at AMC.
As a percentage of revenue, medical supplies and other, and personnel costs were
56.6% and 69.3% for the three months ended June 30, 1995 and 1996, respectively
and were 58.2% and 65.8% for the nine months ended June 30, 1995 and 1996. The
increase in each period is attributable to (i) the initial phase-in of the
McAllen Heart Hospital operations, (ii) an increase in revenues from the
contract to manage AMC, which includes the reimbursement of expenses incurred in
managing the practice and (iii) the recently acquired contract to manage
Mid-Atlantic, which generates slightly lower margins than some existing
operations of the Company.
10
<PAGE>
Results of Operations (continued)
The remainder of the increases in total operating expenses were from
depreciation and amortization expense, the provision for doubtful accounts and
marketing, general and administrative expense. Depreciation and amortization for
the three and nine months ended June 30, 1996 increased 110.6% and 61.0%,
respectively, in comparison to 1995. The increases are attributable to
depreciation of the hospital building and equipment and the amortization of
start-up and organizational costs of the McAllen Heart Hospital, which opened in
January 1996.
The provision for doubtful accounts for the three and nine month periods ended
June 30, 1996 was $181,021 and $313,696, respectively, and was attributable to
provisions for receivables at the McAllen Heart Hospital. MedCath has not
historically experienced significant provisions for doubtful accounts at its
other operations.
Marketing, general and administrative expenses decreased 15.1% for the three
months ended June 30, 1996 compared to the same three month period ended June
30, 1995. Marketing, general and administrative expenses increased 14.9% for the
nine months ended June 30, 1996, over the same period in 1995. The decrease for
the three months ended June 30, 1996 is the result of $315,000 in expenses
related to the transaction and other costs associated with the pooling of
Healthtech in April 1995. Excluding these one- time expenses, marketing, general
and administrative expenses for the three month period would have increased
$115,000, or 8.4%. The increase for the nine months ended June 30, 1996 is
attributable to salaries and other personnel costs incurred by the Company's
Hospital and Physician Practice Management Divisions, as well as its Human
Resources department, all of which were established during fiscal 1996. In
addition, the Company added several development personnel to pursue new business
opportunities and establish new physician relationships and added accounting and
financial personnel to support the growth in management services. The balance of
the increase resulted from higher professional fees associated with pursuing new
business opportunities, bonuses and increases in salaries, and the costs
associated with annual reporting as a public company.
Interest Expense and Interest Income
Interest expense for the three months ended June 30, 1995 and 1996 was $171,000
and $719,000, respectively, an increase of $548,000, or 319.6%. Interest expense
for the nine months ended June 30, 1995 and 1996 was $785,000 and $1.4 million,
respectively, an increase of $664,000, or 84.5%. The increases in each of the
periods is attributable to interest incurred at the McAllen Heart Hospital,
which opened in January 1996. These increases are somewhat offset by interest
expense reductions as a result of repaying outstanding debt and capital leases,
using proceeds from the secondary offering.
Interest income for the three months ended June 30, 1995 and 1996 was $291,000
and $709,000, respectively, a increase of 418,000, or 143.7%. Interest income
for the nine months ended June 30, 1995 and 1996 was $602,000 and $963,000,
respectively, a increase of $361,000, or 60.0%. The increases in each of the
periods is due to the fact that the Company earned additional interest income in
1996 from the proceeds of the public offering.
11
<PAGE>
Results of Operations (continued)
Minority Interests in Earnings of Consolidated Entities
The consolidated financial statements include all assets, liabilities, revenues
and expenses of less than 100% owned entities controlled by the Company.
Accordingly, the Company has recorded minority interests in the earnings and
equity of such entities. Minority interests in earnings of consolidated entities
for the three months ended June 30, 1995 and 1996 was $393,000 and $327,000,
respectively, a decrease of $66,000, or 16.9%. Minority interests in earnings of
consolidated entities for the nine months ended June 30, 1995 and 1996 was $1.2
million and $718,000, respectively, a decrease of $437,000, or 37.8%. The
decreases for the three and nine months ended June 30, 1996 were attributable to
a portion of the minority partners share of the operating losses incurred at the
McAllen Heart Hospital.
The McAllen Heart Hospital is operated by a limited partnership in which MedCath
owns an approximately 51% interest and serves as the general partner. During the
quarter, the cumulative losses that were to be allocated to the limited partners
exceeded their initial capital contribution of $705,000. Therefore the Company
was no longer able to allocate any losses to its minority partners and began
recognizing 100% of the partnership's operating losses. The effect of
recognizing losses that would otherwise have been allocated to the minority
partners was a reduction in earnings of approximately $0.05 per share in the
Company's third quarter. The Company must continue to recognize 100% of the
partnership's losses until such time as the partnership begins operating
profitably, at which time the Company will be entitled to recognize 100% of the
partnership's earnings to the extent it has previously recognized a
disproportionate share of the partnership's losses.
Liquidity and Capital Resources
Operating Cash Flows
Net cash provided by operating activities was $1.4 million for the nine months
ended June 30, 1996. At June 30, 1996 accounts receivable was $10.9 million and
increased $6.4 million during the nine month period then ended. This increase
was attributable to revenues at the McAllen Heart Hospital, which opened in
January 1996, increased revenues in the Company's other divisions and new
company operations. At June 30, 1996, the Company had working capital of $70.1
million, including $63.8 million of cash and short-term investments.
Investing Cash Flows
During the nine months ended June 30, 1996, the Company utilized a net of $83.9
million in investing activities consisting of $46.7 million to purchase short
term investments using proceeds of the offering, $16.3 million to complete
construction of and to fund equipment and the initial start up costs of the
McAllen Heart Hospital, $3.2 million and $2.8 million for the purchase of land
as the sites for the Arkansas and Tucson Heart Hospitals, respectively, $8.7
million to commence construction and development of the Arkansas Heart Hospital
and $6.2 million for working capital advances and other equipment purchases at
the Company's other operations.
Financing Cash Flows
In January 1996, the Company's Credit Agreement was amended to increase the
maximum amount available under the Revolver from $ 11 million to $20 million.
The proceeds of the Revolver have been and will continue to be used to finance
certain acquisitions approved by the lender, and to meet ongoing working capital
requirements. As of June 30, 1996, $17.9 million was available under the
Revolver (see Note 3).
12
<PAGE>
Liquidity and Capital Resources (continued)
The total cost of constructing and equipping the McAllen Heart Hospital,
including land acquisition costs, was $28.1 million. The land and construction
costs were financed primarily through the McAllen REIT Loan and the equipment
was financed primarily through installment notes payable to equipment lenders.
During the nine months ended June 30, 1996, the Company borrowed $11.3 million
to complete construction of the McAllen Heart Hospital and $10.9 million to
purchase equipment (see Note 3).
The Company anticipates that the total cost of constructing the Arkansas Heart
Hospital and the Tucson Heart Hospital will be approximately $43 million and $31
million, respectively. Construction of the Arkansas Heart Hospital commenced in
January 1996, and the Company expects that construction of the Tucson Heart
Hospital will commence in the 4th quarter of 1996.
In December 1995, the Company obtained the Arkansas REIT Loan for the purpose of
financing the land acquisition and construction costs of the Arkansas Heart
Hospital. The Arkansas REIT Loan provides for maximum borrowings of $27 million
and during the nine months ended June 30, 1996, the Company borrowed $11.3
million to acquire the land on which the hospital will be constructed and to
begin construction of the hospital.
In April 1996, the Company announced it has formed a venture for the purpose of
constructing and operating the Austin Heart Hospital. The Company anticipates
the total cost of the Austin Heart Hospital will be approximately $27.5 million.
The Company expects to begin construction on the Austin Heart Hospital in fiscal
1997 and open the Austin Heart Hospital in fiscal 1998.
In April 1996, the Company completed a public offering of 2.3 million shares of
its common stock. Gross and net proceeds from the offering were $66.1 million
and $62.5 million respectively. A portion of the proceeds was used to repay
$5.0 million outstanding under the Revolver and $3.3 million was used to retire
obligations under capital leases. The remainder of the proceeds is to be used
to fund (i) a portion of the construction and start-up costs of the Arkansas,
Tucson and Austin Heart Hospitals and the development of new heart hospitals and
Fixed-Site Facilities, (ii) potential future acquisitions, (iii) working capital
and (iv) general corporate purposes.
In July 1996, the Company entered into a construction and term loan agreement
with a REIT for the purpose of financing the land acquisition and construction
costs of the Tucson Heart Hospital (the "Tucson REIT loan"). The Tucson REIT
loan provides for maximum borrowings of $20 million.
The Company anticipates financing its future operations through a combination of
amounts available under the Revolver, financing from other real estate lenders
and various equipment lenders, cash reserves and operating cash flows. The
Company believes the combination of these sources will be sufficient to meet the
Company's currently anticipated heart hospital development, acquisition and
working capital needs through fiscal 1997. In addition, in order to provide
funds necessary for the continued pursuit of its business strategy, the Company
expects to incur, from time to time, additional indebtedness to banks and other
financial institutions and to issue, in public or private transactions, equity
and debt securities. The availability and terms of any such financing will
depend upon market and other conditions. There can be no assurance that such
additional financing will be available on terms acceptable to the Company.
13
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (included only in the
EDGAR filing)
99 Press release dated August 1, 1996
(b) Reports on Form 8-K
(1) The Company filed a Current Report on Form 8-K dated
July 1, 1996 pursuant to Item 5 of that form reporting that the
Company anticipated lower earnings for the quarter ended June 30,
1996 and also responded to an article published on June 26, 1996
in the Wall Street Journal.
(2) The Company filed a Current Report on Form 8-K dated
July 16, 1996 pursuant to Item 5 of that form reporting that the
Company had engaged Ernst & Young LLP, independent auditors, to
conduct certain procedures related to the accounting treatment
for the billing and recording of Medicare patient revenues in its
McAllen Heart Hospital. The Company also announced that financing
had been obtained for the land purchase and construction of its
third heart hospital, Tucson Heart Hospital, located in Tucson,
Arizona.
14
<PAGE>
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 INCORPORATED
Date Signature and Title
August 14, 1996 /s/ Stephen R. Puckett
--------------------------
Stephen R. Puckett
Chairman of the Board of
Directors and Chief Executive
Officer
August 14, 1996 /s/ Daniel L. Belongia
--------------------------
Daniel L. Belongia
Secretary and Chief Financial
and Administrative Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at June 30, 1996
(Unaudited) and the Condensed Consolidated Statement of Income for the
nine months ended June 30, 1996 (Unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000931782
<NAME> MedCath Inc.
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Jun-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,457,694
<SECURITIES> 58,399,706
<RECEIVABLES> 11,170,879
<ALLOWANCES> (285,616)
<INVENTORY> 1,264,518
<CURRENT-ASSETS> 77,279,979
<PP&E> 67,599,962
<DEPRECIATION> (10,580,580)
<TOTAL-ASSETS> 167,308,980
<CURRENT-LIABILITIES> 7,146,279
<BONDS> 34,764,493
0
0
<COMMON> 111,202
<OTHER-SE> 118,614,694
<TOTAL-LIABILITY-AND-EQUITY> 167,308,980
<SALES> 0
<TOTAL-REVENUES> 46,868,372
<CGS> 0
<TOTAL-COSTS> 30,868,179
<OTHER-EXPENSES> 8,402,561
<LOSS-PROVISION> 313,696
<INTEREST-EXPENSE> 1,449,236
<INCOME-PRETAX> 6,168,191
<INCOME-TAX> 2,467,276
<INCOME-CONTINUING> 3,700,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,700,915
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
Exhibit 99
N E W S R E L E A S E
MEDCATH INCORPORATED ANNOUNCES THIRD QUARTER RESULTS
Third Quarter Highlights:
Record Profitability in Physician Practice Management and Diagnostics
Divisions
Three Additional Physicians Invest in McAllen Heart Hospital
McAllen Heart Hospital Experiences Strong July Volume
Financing Obtained for Land Purchase and Construction of Tucson Heart
Hospital
Alternate Option Now Available for New Hospital Medicare Certification
Company Confirms Its Medicare Accounting Conforms to GAAP and Industry
Practices
One of the Two Cardiology Groups Invested in the McAllen Heart Hospital
Adds Three New Physicians
Charlotte, North Carolina (August 1, 1996) - MedCath Incorporated
(Nasdaq/NM:MCTH) today announced financial results for the quarter and nine
months ended June 30, 1996.
Stephen R. Puckett, president of MedCath Incorporated, said, "The
Company continues to experience superior profit contribution from our Physician
Practice Management and Diagnostics Divisions. The success of these divisions
permits us to focus resources on improving the operating performance and
physician relationships at our new heart hospital in McAllen, Texas. We are also
devoting considerable effort to ensuring the continued progress of our three
other heart hospitals which are in various stages of development in Little Rock,
Arkansas, Tucson, Arizona, and Austin, Texas. We remain excited and very bullish
about the profit potential of all four of our heart hospital projects."
Mr. Puckett also said, "I would be remiss if I did not express my
personal disappointment about the decline, in the value of our common stock.
Although we believe much of the decline is attributable to factors beyond our
control, including erroneous newspaper articles, it is our job as managers to
maintain a steady course and, through our actions and performance, to rekindle
investor interest in our strategy and our stock. Please understand that this is
a responsibility which we accept and a mission to which we are fully committed."
Financial Results:
Revenues for the third quarter ended June 30, 1996, increased 77% to $18.4
million compared with $10.4 million for the same period in 1995. Net income for
the third quarter ended June 30, 1996, increased 3 % to $1.2 million, or $0.10
per share, on 11.3 million shares, compared with $1.1 million, or $0.13 per
share, on 8.8 million shares for the same period in 1995. The third quarter was
negatively impacted by $0.05 per share from the unanticipated recognition of
100% of the operating losses of the McAllen Heart Hospital partnership. Because
the cumulative losses that have been allocated to the limited partners exceed
their capital contribution, the Company can no longer allocate any losses to its
minority partners and began recognizing 100% of the partnership's operating
losses. The Company will have to continue recognizing 100% of the partnership's
losses until such time as the partnership begins operating profitably, at which
time the Company will be entitled to recognize 100% of the partnership's
earnings to the extent it has previously recognized a disproportionate share of
the partnership's losses.
<PAGE>
MCTH Announces Third Quarter Results
Page 2
August 1, 1996
For the nine months ended June 30, 1996, revenues increased 54% to
$46.9 million compared with $30.4 million for the same period in 1995. Net
income for the nine months ended June 30, 1996, increased 16% to $3.7 million,
or $0.38 per share on 9.8 million shares, compared with $3.2 million, or $0.39
per share, on 8.2 million shares before the extraordinary loss for the same
period in 1995.
Mr. Puckett further stated, "Based on the July procedure volumes and
average daily census at the McAllen Heart Hospital, the fourth quarter looks
promising. We expect that the hospital's operating results will continue to
improve through the fourth quarter and, accordingly, we estimate that the
Company's earnings for the fourth quarter to be in the range of $0.09 to $0.14
per share."
Other Significant Developments:
Strong Results in Physician Practice Management and Diagnostics
Divisions. During the quarter, these divisions achieved record performance which
significantly impacted the profitability of the Company. The Company will
further expand by opening three new facilities by the end of calendar 1996: Cape
Cod Cardiac Cath, Hyannis, Massachusetts, in August 1996; Gaston Cardiology
Services, Gastonia, North Carolina, in October 1996; and Cardiac Diagnostic
Center, Raleigh, North Carolina, in October 1996. The Company manages two
physician practices having a total of 66 physicians under management, an
increase of 35% from 49 physicians under management at September 30, 1995.
Commenting on the Company's success in these divisions, Mr. Puckett
said, "With the opening of the three new facilities later this year, over 325
cardiologists will perform services or have privileges at facilities within
these divisions. We are indeed fortunate to have these strong divisions to
ensure the Company's profitability during the development stage for our heart
hospital division, which we expect to be a major contributor to the Company's
success in the future.
McAllen Heart Hospital, McAllen, Texas. The Company opened its first
heart hospital, McAllen Heart Hospital, on January 18, 1996. During the month of
July 1996, the hospital's sixth full month of operations, the hospital enjoyed
the highest monthly gross revenues to date as a result of strong procedure
volumes and a higher average daily census than experienced in the third quarter.
The July gross revenues exceed those of June by 48%. In July, the hospital
performed 149 caths, 44 PTCAs, 36 open heart cases and 46 other invasive and
surgical procedures. Average daily census for the month was 28, with the f~rst
half of the month averaging 22 and the second half of the month averaging 34. By
comparison, for the third quarter, the hospital performed a monthly average of
146 caths, 33 PTCAs, 29 open heart cases and 29 other invasive and surgical
procedures. The average daily census for the third quarter was 25.
Two additional cardiologists and one primary care physician recently
invested in the McAllen Heart Hospital, bringing the total number of physician
investors in the hospital to 56. Mr. Puckett stated, "We are excited to have
added these new physicians to our team of hospital investors. In addition, a
cardiology group invested in the hospital has added one cardiologist and two
surgeons. This is indicative of the support our hospital is receiving from area
physicians and further strengthens our resources to continue to reduce the cost
of treating cardiovascular disease."
<PAGE>
MCTH Announces Third Quarter Results
Page 3
August 1, 1996
As a result of questions raised in a newspaper article which were
related to the Company's revenue recognition policies for the quarter ended
March 31, 1996, the Company engaged its independent auditors, Ernst & Young LLP,
to perform certain procedures related to the accounting treatment for billing
and recording of Medicare patient revenues in its McAllen Heart Hospital. Based
upon the work of Ernst & Young and its own review, the Company believes that the
McAllen Heart Hospital records revenues in accordance with GAAP and industry
standards. MedCath's reported net revenues at the McAllen Heart Hospital for
services provided to Medicare reimbursement-eligible patients during the quarter
ended March 31, 1996, were $2.4 million. As of July 29, 1996, MedCath had
received reimbursement for 99%, or all but approximately $26,000' of the $2.4
million from either Medicare, Medicare Supplemental payors or Medicare
beneficiaries.
Tucson Heart Hospital, Tucson, Arizona. The Company recently announced
that it had obtained financing for the land purchase and construction of its
third heart hospital. The financing, which closed on July 19, 1996, is being
furnished by a REIT and provides for amounts up to $20 million. The Tucson Heart
Hospital is expected to open in July of 1997.
Arkansas Heart Hospital, Little Rock, Arkansas. This will be MedCath's
second heart hospital and is scheduled to open in March 1997. The Company
recently announced that it expects the hospital to receive timely Medicare
certification and open on schedule. Potential delays in Medicare certification
by HCFA due to reduced federal funding are now considered unlikely since the
Department of Health and Human Services recently agreed to accept the successful
completion of an initial survey by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) for entry into the Medicare program
Heart Hospital of Austin, Austin, Texas. During the quarter, MedCath
announced that it had formed a venture to construct a new $28 million heart
hospital in Austin, Texas. This will be MedCath's fourth heart hospital project.
The venture plans to complete the 60-bed hospital by late 1997 or early 1998.
Statements contained in this press release which are not historical facts may be
considered forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected. Such risks and uncertainties include
construction and development risks associated with heart hospitals; operating
losses and negative cash flows during the initial operation of heart hospitals;
dependence on physician relationships; dependence on long-term management
contracts; fluctuations in quarterly operating results from seasonality,
population shifts and other factors; dependence on key management; as well as
other risks detailed in the Company's filings with the Securities and Exchange
Commission. Results of operations for the nine months ended June 30, 1996, and
operating data reported for interim periods are not necessarily indicative of
the results and operating data to be expected for the full year.
MedCath Incorporated is a provider of cardiology and cardiovascular
services through the operation of specialized facilities and the management of
physician practices. The Company operates one specialty heart hospital and has
three additional heart hospitals under development, manages two medical
practices comprised of a total of 66 physicians, manages fixed-site cardiac
diagnostic and therapeutic centers, and owns and operates mobile cardiac
catheterization laboratories serving networks of hospitals.
<PAGE>
MCTH Announces Third Quarter Results
Page 4
August 1, 1996
<TABLE>
<CAPTION>
MEDCATH INCORPORATED
Financial Highlights
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue $ 18,375,810 $ 10,367,815 $ 46,868,372 $ 30,423,579
Operating expenses (16,108,336) (8,239,669) (39,584,436) (23,872,181)
------------ ------------- ------------ -------------
Income from Operations 2,267,474 2,128,146 7,283,936 6,551,398
Income before income taxes
and extraordinary item 1,953,853 1,881,482 6,168,191 5,288,340
Provision for income taxes (781,541) (745,950) (2,467,276) (2,086,962)
------------- ------------- ------------- -------------
Income before extraordinary item 1,172,312 1,135,532 3,700,915 3,201,378
Extraordinary loss on early
extinguishment of debt (net of tax) - - - (227,951)
-------------- ------------- ------------- -------------
Net income $ 1,172,312 $ 1,135,532 $ 3,700,915 $ 2,973,427
------------- ------------- ------------- -------------
Net income per common and common
equivalent share:
Income before extraordinary item $ 0.10 $ 0.13 $ 0.38 $ 0.39
Extraordinary loss on early
extinguishment of debt (net of tax) $ - $ - $ - $ (0.03)
Net income per common and
common equivalent share $ 0.10 $ 0.13 $ 0.38 $ 0.36
------------- ------------- ------------- -------------
Weighted average number
of shares outstandina 11,330, 391 8,844,832 9,814,686 8,210,180
</TABLE>
