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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-25176
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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
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(Address of principal executive officers)
(Zip Code)
(704) 541-3228
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(Registrant's telephone number, including area code)
Not Applicable
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(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 July 31, 1997, there were 11,152,690 Common Shares outstanding.
<PAGE>
MEDCATH INCORPORATED
FORM 10-Q
June 30, 1997
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 9-14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
<PAGE>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------------------------------------------------
1996 1997 1996 1997
---------------------------------------------------------------------
<S> <C>
Net revenue $ 18,375,810 $ 29,915,211 $ 46,868,372 $ 79,479,155
Operating expenses:
Medical supplies and other 7,155,778 11,606,458 18,158,849 31,016,024
Personnel costs 5,585,120 8,232,826 12,709,330 21,369,816
Depreciation 1,301,140 2,344,139 3,139,930 5,617,148
Amortization 639,379 1,361,120 1,392,706 3,042,859
Provision for doubtful accounts 181,021 777,640 313,696 1,715,486
Marketing, general and administrative 1,245,898 1,558,249 3,869,925 5,257,563
---------------------------------------------------------------------
Total operating expenses 16,108,336 25,880,432 39,584,436 68,018,896
---------------------------------------------------------------------
Income from operations 2,267,474 4,034,779 7,283,936 11,460,259
Interest expense (719,281) (1,862,104) (1,449,236) (3,398,509)
Interest income 708,555 488,008 962,609 1,744,629
Minority interest in earnings of consolidated entities (326,588) (197,591) (718,762) (1,037,762)
Equity in net earnings of unconsolidated joint venture 23,693 - 89,644 -
---------------------------------------------------------------------
Income before income taxes 1,953,853 2,463,092 6,168,191 8,768,617
Provision for income taxes (781,541) (917,490) (2,467,276) (3,371,448)
=====================================================================
Net income $ 1,172,312 $ 1,545,602 $ 3,700,915 $ 5,397,169
=====================================================================
Net income per share $ 0.10 $ 0.13 $ 0.38 $ 0.46
=====================================================================
Weighted average number of common and common
equivalent shares outstanding 11,330,391 11,661,617 9,814,686 11,665,056
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
MedCath Incorporated
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
--------------------- --------------------
1996 1997
--------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,026,305 $ 9,677,747
Short-term investments 56,667,244 26,611,488
Accounts receivable, net of allowance 11,155,477 23,759,822
Medical supplies 1,549,029 2,787,847
Prepaid expenses and other current assets 610,137 762,771
--------------------- --------------------
Total current assets 75,008,192 63,599,675
Property, plant and equipment, net of accumulated depreciation 72,303,824 119,864,232
Other assets 1,910,092 1,874,128
Start-up and organization costs, net of accumulated amortization 7,628,018 11,822,853
Advances to physician groups 5,609,178 7,392,385
Intangible assets, net of accumulated amortization 19,221,414 26,475,305
===================== ====================
Total assets $ 181,680,718 $ 231,028,578
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,861,343 $ 2,400,993
Distribution payable to minority interests 629,352 903,246
Accrued liabilities 3,623,704 6,123,036
Current portion of long-term debt 1,931,455 2,148,283
Current portion of obligations under capital leases 392,713 391,068
--------------------- --------------------
Total current liabilities 9,438,567 11,966,626
Deferred income taxes 2,624,535 3,646,210
Long-term debt 43,841,641 80,542,572
Obligations under capital leases 2,053,797 2,344,283
--------------------- --------------------
Total liabilities 57,958,540 98,499,691
Minority interests in equity of consolidated entities 3,477,085 6,775,597
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, and 11,121,326
and 11,152,690 shares issued and outstanding
at September 30, 1996 and June 30, 1997, respectively 111,213 111,526
Paid-in capital 108,897,931 109,008,646
Retained earnings 11,235,949 16,633,118
--------------------- --------------------
Total shareholders' equity 120,245,093 125,753,290
--------------------- --------------------
Total liabilities, minority interests and shareholders' equity $ 181,680,718 $ 231,028,578
===================== ====================
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------
1996 1997
------------------ -----------------
<S> <C> <C>
Operating activities
Net Income $ 3,700,915 $ 5,397,169
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,628,788 8,776,611
Equity in net earnings of unconsolidated joint venture (89,644) -
Minority interest (721,396) (767,852)
Deferred income taxes 336,200 1,021,675
Increase in current assets:
Accounts receivable (6,125,075) (12,589,311)
Medical supplies (869,912) (1,238,818)
Prepaid expenses and other current assets (846,219) (99,756)
Increase (decrease) in current liabilities:
Accounts payable 893,430 (635,816)
Distribution payable to minority interest (78,692) 273,894
Accrued liabilities 836,218 2,462,308
Other (216,773) (55,098)
------------------ -----------------
Net cash provided by operating activities 1,447,840 2,545,006
Investing activities
Purchases of property, plant and equipment (31,282,795) (52,821,068)
Proceeds from sale of assets 790,800 -
Start-up and organization costs (5,292,784) (6,546,286)
Advances to physician groups (1,801,971) (2,465,618)
Repayments of advances to physician groups 315,463 682,412
Net (purchase) sale of short-term investments (46,696,687) 30,055,756
------------------ -----------------
Net cash used in investing activities (83,967,974) (31,094,804)
Financing activities
Proceeds from issuance of long-term debt 28,558,535 33,220,841
Repayments of long-term debt (5,830,206) (3,719,391)
Repayments of obligations under capital leases (4,193,534) (386,489)
Proceeds from issuance of common stock 62,639,532 111,028
Investments by minority partners 355,489 4,066,364
Payment of loan acquisition costs and deferred loan fees (373,716) (91,113)
------------------ -----------------
Net cash provided by financing activities 81,156,100 33,201,240
------------------ -----------------
Net (decrease) increase in cash and equivalents (1,364,034) 4,651,442
Cash and cash equivalents, beginning of period 6,821,728 5,026,305
------------------ -----------------
Cash and cash equivalents, end of period $ 5,457,694 $ 9,677,747
================== =================
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three and Nine Month Periods Ended June 30, 1997
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 of 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, 1997 are not necessarily indicative
of the results that may be expected for the year ending September 30, 1997. 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, 1996. Unless otherwise specified, capitalized terms
used herein are used as defined in such 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 and assumptions.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 shares 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 and the assumed conversion of all outstanding
convertible debt. 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
Long term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
--------------------------------------
<S> <C> <C>
McAllen REIT Loan $ 13,750,000 $ 13,750,000
Arkansas REIT Loan 19,757,558 29,000,000
Tucson REIT Loan 1,062,531 13,686,401
Convertible subordinated debt - 4,451,971
Notes payable to equipment lenders 10,689,071 20,190,344
Other notes payable 513,936 1,612,139
--------------------------------------
45,773,096 82,690,855
Less current portion (1,931,455) (2,148,283)
======================================
$ 43,841,641 $ 80,542,572
======================================
</TABLE>
As of June 30, 1997, approximately $18.0 million was available under the
Company's $20 million Revolver, as computed in accordance with the borrowing
base, and there were no amounts outstanding. The proceeds of the Revolver have
been and are to be used to meet ongoing working capital requirements and to
finance certain acquisitions approved by the lender.
6
<PAGE>
Note 3 - Long - Term Debt (continued)
In fiscal year 1997, the Company acquired substantially all of the medical and
other equipment for the Arkansas Heart Hospital under installment notes payable
to equipment lenders. Amounts borrowed under these notes are payable in monthly
installments of principal and interest over five years. The notes are secured by
the related equipment and bear interest at rates ranging from 9.62% to 10.25%.
In October 1996, the Company issued a convertible subordinated promissory note
in the amount of $6.4 million in connection with the acquisition of a contract
to manage Heart Clinic, P.A. (See Note 4). In November 1996, $1.9 million of the
outstanding principal balance was paid in accordance with the terms of the note.
The remaining principal amount of the note is due and payable on October 1,
1998, in cash or in shares of common stock of the Company at a conversion price
of $14 per share. Interest is payable annually at a rate of 4% on the
outstanding principal. A contingent convertible subordinated promissory note was
also issued in October 1996 and the amount of the note will be based on
performance levels of the Heart Clinic physicians for the 1997 calendar year.
In March 1997, the Company obtained a financing commitment for up to $32 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital. The interest rate will
be at a premium above LIBOR and the outstanding principal balance will be due
and payable in full three years from the closing of the note, if the Company's
optional extension of one year is not exercised. The Company expects to close
the transaction during the fourth fiscal quarter of 1997.
In April 1997, the Company obtained a commitment for a $20 million revolving
credit facility to replace the Company's existing Revolver. The proceeds of the
new revolving credit facility are to be used for working capital, acquisitions,
and for general corporate purposes. The interest rate is variable at a premium
above the LIBOR rate. In July 1997, the transaction was completed under the
terms set forth above.
In July 1997, the Company obtained a financing commitment for up to $35 million
for the purpose of financing the land acquisition and construction costs of the
Heart Hospital of Austin. The interest rate is based on a fixed premium above
the seven-year treasury note rate and the principal and interest is payable over
a seven year term. The Company expects to close the transaction during the
fourth fiscal quarter of 1997.
Note 4 - Business Combinations and New Operations
In September 1996, the Company formed PMMI. In October 1996, PMMI entered into a
40-year contract to manage Heart Clinic, P.A., a multi-physician cardiologist
group located in McAllen, Texas. Total consideration given in connection with
the acquisition of the management contract was approximately $6.3 million
(subject to increase if certain base performance levels are exceeded in 1997 by
the physicians) and consisted of fixed and contingent promissory notes that are
partially convertible into the Company's common stock (see Note 3).
In January 1997, the Company announced it had formed a venture for the purpose
of constructing and operating the Arizona Heart Hospital to be located in
Phoenix, Arizona. The Arizona Heart Hospital will be owned and operated by a
limited liability company in which the Company owns a majority interest and
serves as manager. The Company expects the total cost of constructing and
equipping the Arizona Heart Hospital to be approximately $47 million and plans
to open the hospital in fiscal year 1998.
7
<PAGE>
Note 4 - Business Combinations and New Operations (continued)
On March 3, 1997, the Arkansas Heart Hospital received Medicare certification
from the Arkansas Department of Health and opened slightly earlier than
anticipated. The Company serves as the managing member with a 51% interest in
the limited liability company that operates the Arkansas Heart Hospital.
Note 5 - Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share, for the quarters ended June 30, 1996 and June 30,
1997, of $.01 per share, respectively. The impact is expected to result in an
increase in primary earnings per share, for the nine months ended June 30, 1996
and June 30, 1997, of $.01 per share and $.02 per share, respectively. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these periods is not expected to be material.
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, 1997
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 notes thereto. 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, 1996.
Acquisitions and New Operations
In September 1996, the Company formed PMMI. In October 1996, PMMI entered into a
40-year contract to manage Heart Clinic, P.A., a multi-physician cardiologist
group located in McAllen, Texas (See Notes 3 and 4).
In January 1997, the Company announced it had formed a venture for the purpose
of constructing and operating the Arizona Heart Hospital to be located in
Phoenix, Arizona. The Arizona Heart Hospital will be owned and operated by a
limited liability company in which the Company owns a majority interest and
serves as manager (See Notes 3 and 4).
On March 3, 1997, the Arkansas Heart Hospital received Medicare certification
from the Arkansas Department of Health and opened slightly earlier than
anticipated. The Company serves as the managing member with a 51% interest in
the limited liability company that operates the Arkansas Heart Hospital.
Results of Operations
The following table sets forth, for the periods presented, the percentage of the
Company's net revenue represented by the net revenue of each of the Company's
three divisions and by certain items reflected in the Unaudited Condensed
Consolidated Statements of Income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------------------------------------
1996 1997 1996 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Diagnostics Division 47.1% 30.6% 56.0% 35.6%
Practice Management Division 22.4 15.4 23.1 18.1
Hospital Division 30.5 54.0 20.9 46.3
-------------------------------------------------------------
Total net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical supplies, personnel & other 69.3 66.3 65.8 65.9
Depreciation and amortization 10.6 12.3 9.7 10.9
Provision for doubtful accounts 1.0 2.6 .7 2.2
Marketing, general and administrative 6.8 5.2 8.3 6.6
-------------------------------------------------------------
Total operating expenses 87.7 86.4 84.5 85.6
-------------------------------------------------------------
Income from operations 12.3 13.6 15.5 14.4
Interest expense (3.9) (6.2) (3.1) (4.3)
Interest income 3.9 1.6 2.1 2.2
Minority interest in earnings of consolidated entities (1.8) (0.7) (1.5) (1.3)
Equity in earnings of unconsolidated subsidiaries .1 - .2 -
-------------------------------------------------------------
Income before income taxes 10.6 8.3 13.2 11.0
Provision for income taxes (4.2) (3.1) (5.3) (4.2)
-------------------------------------------------------------
Net income 6.4% 5.2% 7.9% 6.8%
=============================================================
</TABLE>
9
<PAGE>
Results of Operations (continued)
Net revenue
Consolidated net revenue for the third quarter and nine months ended June 30,
1997 increased $11.5 million or 62.8% and $32.6 million or 69.6%, respectively,
over the comparable prior year periods. These increases are primarily a result
of net revenue generated at the McAllen and Arkansas Heart Hospitals. The
remainder of the increases in net revenue are the result of new operations in
both the Practice Management Division and the Diagnostics Division.
Net revenue in the Diagnostics Division for the third quarter and nine months
ended June 30, 1997 increased $507,000 or 5.9% and $2.1 million or 8.0%,
respectively, over the comparable prior year periods. The increase in net
revenue during both the three and nine month periods was attributable to three
new Fixed-Site Facilities which opened within the last year. The number of
Fixed-Site Facilities and Mobile Cath Labs either owned or operated by the
Company increased from a total of 28 in fiscal year 1996 to a total of 31 in
fiscal year 1997.
Net revenue in the Practice Management Division for the third quarter and nine
months ended June 30, 1997 increased $292,000 or 7.1% and $3.3 million or 30.8%,
respectively, over the comparable prior year periods. The increase in net
revenue during the three and nine month periods was primarily attributable to
the acquisition of a contract to manage Heart Clinic, P.A. ("Heart Clinic"), in
October 1996. Also contributing to the increase in net revenue during both
periods is the increase in net revenue from the two existing management
contracts, one of which was acquired in February 1996. The total number of
physicians under management in the Practice Management Division at this quarter
end is 79 compared with 66 at the same time last year.
Net revenue in the Hospital Division for the third quarter and nine months ended
June 30, 1997 increased $10.6 million or 188.3% and $27.0 million or 275.1%,
respectively, over the comparable prior year periods. The increase in the third
quarter of this year is primarily due to net revenue generated at the Arkansas
Heart Hospital located in Little Rock, Arkansas, which opened in March of this
year and to an increase in net revenue at the McAllen Heart Hospital over the
comparable prior year period of 1996. The increase over the prior year nine
month period is attributable to net revenue at the McAllen Heart Hospital, which
opened in January 1996, and four months of net revenue from the Arkansas Heart
Hospital this year.
Income from Operations
Consolidated income from operations for the third quarter and nine months ended
June 30, 1997 increased $1.8 million or 77.9% and $4.2 million or 57.3%,
respectively, over the comparable prior year periods. These increases are
attributable to increased operating income at the McAllen Heart Hospital over
the prior year and operating income at the Arkansas Heart Hospital which opened
in March of this year. Operating margins increased for the third quarter ended
June 30, 1997 to 13.5% from 12.3% in 1996 and decreased for the nine months
ended June 30, 1997 to 14.4% from 15.5% in 1996. The improvement in the third
quarter operating margin over the comparable prior year period is the result of
substantial margin improvements in the Hospital Division. The decrease in the
year to date operating margin is the result of the increased contribution to
revenue by the Hospital Division, which operates at slightly lower margins than
the Company's other operating divisions, and to a slight decline in margins in
the Diagnostics Division due to lower patient volumes at several facilities.
EBITDA margins for the third quarter and nine months ended June 30, 1997
increased to 25.9% from 22.9% and to 25.3% from 25.2%, respectively, over the
comparable prior year periods. The three and nine month improvements in EBITDA
margin can be attributed to the substantial margin improvements in the
Hospital Division
10
<PAGE>
Results of Operations (continued)
Income from operations in the Diagnostics Division decreased $348,000 or 9.4%
for the third quarter ended June 30, 1997 and increased $80,000 or .8% for the
nine months ended June 30, 1997, over the comparable respective prior year
periods. The decrease in the third quarter compared with the record results
achieved in the prior year is the result of slightly lower patient volumes at
several of the Company's facilities. The increase in the nine month period over
the comparable prior year period is due to the income from operations at three
new Fixed Site Facilities, which have opened within the last year. The year to
date increases at these new facilities are offset by slightly lower patient
volumes at several other of the Company's facilities. Operating margins
decreased for the third quarter and nine months ended June 30, 1997 over the
comparable periods in 1996 to 36.5% from 42.6% and to 36.3% from 38.9%,
respectively. EBITDA margins for the third quarter and nine months ended June
30, 1997 decreased in the Diagnostics Division to 48.5% from 52.3% and to 47.6%
from 48.8%, respectively. These decreases are primarily the result of the
slightly lower patient volumes at several of the Company's facilities.
Income from operations in the Practice Management Division for the third quarter
and nine months ended June 30, 1997 increased $79,000 or 14.5% and $529,000 or
41.7%, respectively, over the comparable prior year periods. These increases are
the result of income from operations generated from the contract to manage Heart
Clinic, which was acquired in October 1996. Operating margins in the Practice
Management Division for the third quarter and nine months ended June 30, 1997
increased to 14.1% from 13.2% and to 12.7% from 11.7%, respectively, over the
comparable prior year periods. EBITDA margins in the Practice Management
Division for the third quarter and nine months ended June 30, 1997 also
increased to 16.8% from 14.8% and to 15.1% from 13.3%, respectively, over the
comparable prior year periods. These increases are attributable to the higher
margins produced from the contract to manage Heart Clinic, due to a different
management fee structure than the Company's existing management contracts.
Income from operations in the Hospital Division for the third quarter and nine
months ended June 30, 1997 increased $2.0 million or 193.6% and $4.3 million or
289.3%, respectively, over the comparable prior year periods. Operating margins
in the Hospital Division for the third quarter and nine months ended June 30,
1997 increased to 5.9% from (18.1)% and to 7.6% from (15.1)%, respectively, over
the comparable prior year periods. EBITDA margins in the Hospital Division for
the third quarter and nine months ended June 30, 1997 increased to 20.9% from
.1% and to 21.3% from 2.6%, respectively, over the same comparable prior year
periods. The increases in the three month and nine month periods in income from
operations, operating margins and EBITDA margins are attributable to the
substantial improvement in the results of operations at the McAllen Heart
Hospital, which was in the initial six months of operations in fiscal year 1996,
and due to the results of operations at the Arkansas Heart Hospital, which
opened in March 1997. The results of operations achieved at the Arkansas Heart
Hospital during its initial months of operation are substantially better than
those achieved by the McAllen Hospital during its initial months of operations
in the prior year.
Marketing, general and administrative expenses for the third quarter and nine
months ended June 30, 1997 increased $312,000 or 25.1% and $1.4 million or
35.9%, respectively, over the comparable prior periods. These increases were
primarily a result of the Company's continued investment in corporate
infrastructure to facilitate growth. The Company has continued to add additional
development and finance personnel, as well as personnel for new operations and
acquisitions. The remainder of the increase was attributable to increased
professional fees associated with pursuing business development opportunities,
the addition of administrative and accounting personnel to support growth and
increases in salaries.
11
<PAGE>
Results of Operations (continued)
Interest Expense and Interest Income
Interest expense for the third quarter and nine months ended June 30, 1997
increased $1.1 million or 158.9% and $1.9 million or 134.5%, respectively, over
the comparable prior year periods. These increases are primarily the result of
interest incurred on borrowings used to finance the McAllen and Arkansas Heart
Hospitals. Substantially all of the property, plant and equipment at the
hospitals was financed using borrowings that bear interest at rates ranging from
8.54% to 11.54%. Interest expense incurred prior to the opening of each Heart
Hospital is capitalized as a cost of the building. Interest income for the third
quarter ended June 30, 1997 decreased $221,000 or 31.1% and for the nine months
ended June 30, 1997 increased $782,000 or 81.2%, respectively, over the
comparable prior year periods. The increase in interest income for the nine
month period over the comparable prior year period is the result of interest
earned on investments from the proceeds of a public offering in April of 1996.
The decrease in interest income for the quarter over the comparable prior year
period is the result of utilizing a portion of the public offering proceeds to
fund the Company's Heart Hospital projects.
Liquidity and Capital Resources
Operating Cash Flows
Net cash provided by operating activities was $2.5 million for the nine months
ended June 30, 1997. Accounts receivable increased $12.6 million and accrued
liabilities increased $2.5 million during the nine month period. The increase in
receivables is the result of additional receivables from the opening of the
Arkansas Heart Hospital, additional receivables from new operations and
increased revenues in each of the Company's three operating divisions. The
increase in accrued liabilities is also a result of the opening of the Arkansas
Heart Hospital. At June 30, 1997, the Company had working capital of $51.6
million, including $36.3 million of cash and short-term investments and $23.8
million in accounts receivable.
Investing Cash Flows
During the nine months ended June 30, 1997, the Company utilized a net of $31.1
million in investing activities. A total of $54.3 million was utilized in the
Hospital Division and consisted of land acquisition, construction, equipment and
start-up costs incurred in developing the Company's Heart Hospitals. A net of
$6.9 million was utilized in the Company's other operations. Offsetting these
outflows was $30.1 million provided from the sale of short term investments
which were used to fund a portion of the aforementioned investing activities.
Financing Cash Flows
Financing activities provided a net of $33.2 million during the nine month
period ended June 30, 1997. A total of $32.8 million was provided through
borrowings to finance the construction and equipment costs at the Arkansas and
Tucson Heart Hospitals and $4.1 million was provided by investments from
minority partners in the Company's Heart Hospitals during the nine months.
Offsetting these proceeds was the repayment of a portion of the convertible
subordinated debt, long term debt and capital leases.
In September 1996, the Company formed PMMI, which in October 1996, entered into
a 40-year contract to manage Heart Clinic, P.A., a multi-physician cardiologist
group located in McAllen, Texas. Total consideration given in connection with
the acquisition of the management contract was approximately $6.3 million
(subject to increase if certain base performance levels are exceeded in 1997 by
the physicians) and consisted of fixed and contingent promissory notes that are
partially convertible into the Company's common stock (see Note 3). In November
1996, $1.9 million of the outstanding principal balance was paid in accordance
with the terms of the note.
12
<PAGE>
Liquidity and Capital Resources (continued)
In January 1997, the Company announced it had formed a venture for the purpose
of constructing and operating the Arizona Heart Hospital to be located in
Phoenix, Arizona. The Arizona Heart Hospital will be owned and operated by a
limited liability company in which the Company owns a majority interest and
serves as manager. The Company expects the total cost of constructing and
equipping the Arizona Heart Hospital to be approximately $47 million and plans
to open the hospital in fiscal year 1998.
In March 1997, the Company obtained a financing commitment for up to $32 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital. The interest rate will
be at a fixed premium above LIBOR and the outstanding principal balance will be
due and payable in full three years from closing of the note, if the Company's
optional extension of one year is not exercised. The Company expects to close
the transaction during the fourth fiscal quarter of 1997.
As of June 30, 1997, approximately $18.0 million was available under the
Company's $20 million Revolver, as computed in accordance with the borrowing
base, and there were no amounts outstanding. The proceeds of the Revolver have
been and are to be used to meet ongoing working capital requirements and to
finance certain acquisitions approved by the lender.
In April 1997, the Company obtained a commitment for a $20 million revolving
credit facility to replace the Company's existing Revolver. The proceeds of the
new revolving credit facility are to be used for working capital, acquisitions
and for general corporate purposes. The interest rate is variable at a premium
above the LIBOR rate. In July 1997, the transaction was completed under the
terms set forth above.
In July 1997, the Company obtained a financing commitment for up to $35 million
for the purpose of financing the land acquisition and construction costs of the
Heart Hospital of Austin. The interest rate is based on a fixed premium above
the seven-year treasury note rate and the principal and interest is payable over
a seven year term. The Company expects to close the transaction during the
fourth fiscal quarter of 1997.
The Company expects that each of its Heart Hospitals will require working
capital advances to fund a portion of the pre-opening costs and to fund the
operations subsequent to opening in the initial start-up phase of the hospital.
Substantial investments will be required during the development phase, and
operating losses and negative cash flow will be incurred during the initial
operation of each Heart Hospital.
The Company anticipates financing its future operations through a combination of
amounts available under the Revolver, financing through other real estate and
equipment lenders, capital contributions by minority partners, cash reserves,
short-term investments 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 year 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>
Statements contained herein 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,
third-party payor mix, patient volumes, operating costs and other factors;
dependence on key management; as well as other risks detailed in the Company's
filings with the Securities and Exchange Commission.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Standard Form of Agreement between Owner and Contractor
dated as of May 5, 1997, by and between Arizona Heart
Hospital, LLC and Chanen Construction Company. (In
accordance with Rule 202 of Regulation S-T, this
exhibit is being filed in paper pursuant to a
continuing hardship exemption.)
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K filed during the three months ended June
30, 1997 are as follows:
Date of Report Items Reported
May 16, 1997 Item 5. OTHER EVENTS
April 22, 1997 Item 5. OTHER EVENTS
15
<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
July 31, 1997 /s/ Richard J. Post
-------------------------
Richard J. Post
Chief Financial Officer,
Secretary and Treasurer
16
<PAGE>
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<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at June 30, 1997
(Unaudited) and the Condensed Consolidated Statements of Income for the
nine months ended June 30, 1997 (Unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
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<NAME> MedCath Incorporated
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