FORM 10-K/A No. 3
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
Commission File Number: 0-25176
MedCath Incorporated
(Exact name of Registrant as specified in its charter)
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North Carolina 56-1635096
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
(Address of Principal Executive Offices) (Zip Code)
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(704) 541-3228
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K[ ].
The aggregate market value of the Company's Common Stock (its only voting
stock) held by non-affiliates of the Registrant, as of December 15, 1997, was
$139,023,621. (Reference is made to the final paragraph of Part I herein for a
statement of the assumptions upon which the calculation is based.)
As of December 15, 1997, there were 11,669,359 shares of the Registrant's
Common Stock outstanding.
Documents Incorporated by Reference
NONE
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MedCath Incorporated
Index to Form 10-K/A No. 3
For the Year Ended September 30, 1997
Page
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Part I
Item 1 - Business 3
Item 2 - Properties 18
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 20
Part II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 21
Item 6 - Selected Financial Data 22
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 23
Item 8 - Financial Statements and Supplementary Data 34
Item 9 - Changes in and Disagreements with Accountants or Accounting and Financial
Disclosure 54
Part III
Item 10 - Directors and Executive Officers of the Registrant 55
Item 11 - Executive Compensation 57
Item 12 - Security Ownership of Certain Beneficial Owners and Management 64
Item 13 - Certain Relationships and Related Transactions 66
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 67
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Item 1 - Business
Overview
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
practice management services. The Company affiliates with leading cardiologists
and cardiovascular and vascular surgeons in targeted geographic markets in the
U.S. and provides state-of-the-art facilities, financial resources and
management services. The Company's strategy is to establish and maintain
localized, fully-integrated networks to provide comprehensive diagnostic and
therapeutic cardiac care services. The Company believes that a fully-integrated
network incorporating leading physicians, state-of-the-art facilities and
practice management systems designed to provide high quality, cost-effective
diagnosis and treatment of cardiovascular disease offers significant advantages
to patients, providers and payors.
As part of its strategy, the Company partners with cardiologists and
cardiovascular and vascular surgeons to develop, co-own and operate specialty
heart hospitals ("Heart Hospitals") dedicated to providing comprehensive
professional services to diagnose and treat heart disease. MedCath operates
Heart Hospitals in McAllen, Texas (since January 1996); Little Rock, Arkansas
(since March 1997), and Tucson, Arizona (since October 1997). In addition,
MedCath plans to open Heart Hospitals in Phoenix, Arizona; Austin, Texas;
Bakersfield, California; and in Dayton, Ohio over the next two fiscal years. The
Company has long-term contracts to manage four physician group practices, which
include leading cardiologists and cardiovascular surgeons ("Managed Practices"),
located in Arizona, Virginia and Texas. In addition, MedCath manages seven
fixed-site cardiac diagnostic and therapeutic facilities ("Fixed-Site
Facilities") located in Arizona, New Jersey, Massachusetts and North Carolina
and operates 24 mobile cardiac diagnostic centers ("Mobile Cath Labs"),
principally serving networks of hospitals located in smaller communities
throughout the Unites States.
Business Strategy
MedCath's objective is to remain a leader in the delivery of cardiology and
cardiovascular services by developing affiliations with cardiologists and
cardiovascular and vascular surgeons and providing management services and
state-of-the-art facilities in order to provide high quality, cost-effective
patient care. The Company is achieving this objective by:
o Focusing exclusively on cardiology and cardiovascular services and
remaining a leader in cardiovascular disease management;
o Targeting new geographic markets based largely on the opportunities for
affiliation with leading local cardiologists and cardiovascular and
vascular surgeons;
o Developing, co-owning with local physicians and operating Heart Hospitals
dedicated to providing a comprehensive range of care required to diagnose
and treat heart disease, from outpatient non-invasive diagnostic tests to
sophisticated surgical procedures such as coronary artery bypass graft
surgery. The Company intends to continue to develop Heart Hospitals through
affiliations with cardiologists and cardiovascular and vascular surgeons
who will practice at the hospitals;
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o Operating these Heart Hospitals with a substantially lower cost structure
than conventional acute care hospitals while achieving equivalent or more
favorable outcomes. The majority of medical treatment costs for
cardiovascular disease are incurred in hospitals, therefore the Company
believes that the lower cost structure of its Heart Hospitals will provide
significant competitive advantages;
o Acquiring contracts to provide services to Managed Practices having leading
local market positions. The Company's physician practice management
services include, among others, financing, strategic planning, staffing,
billing and collections, purchasing and marketing and assisting in the
negotiation of managed care contracts.
o Developing, owning or co-owning with leading local physicians or medical
facilities and operating Fixed-Site Facilities and Mobile Cath Labs in
selected markets; and
The Company believes that its fully-integrated networks for cardiac care
will be highly attractive to HMOs and other third-party payors and will be well
positioned to meet the demands of HMOs and other managed care plans for high
quality, cost-effective patient care. Moreover, the Company believes its
strategy reflects future trends in integrated health care delivery systems.
Business Segments
Financial information about the Company's operations by business segment at
September 30, 1995, 1996 and 1997 and for the years then ended is set forth in
Note 15 of Notes to Consolidated Financial Statements, included elsewhere
herein.
Diagnostic and Therapeutic Procedures
As a result of rapid technological developments during the past 35 years, a
wide range of diagnostic and therapeutic treatment options exists today for
patients suffering from heart disease. While heart disease has many forms, by
far the most common form is atherosclerosis, which accounts for the vast
majority of the cases of heart disease. Atherosclerosis causes the inside lining
of arteries that supply blood to the heart to become thickened and hardened by
fatty deposits commonly referred to as plaque.
A brief description of each of the principal cardiac diagnostic and therapeutic
procedures is provided below.
Diagnostic Procedures--Non-lnvasive
Standard Treadmill Exercise Test. During this test, a patient is exercised
on a motorized treadmill while the electrical activity of the patient's heart is
measured using electrodes attached to the patient's chest.
Nuclear Treadmill Exercise Test. In addition to performing a standard
treadmill exercise test, a low level radioactive tracer isotope such as thallium
or technesium is injected into the patient's bloodstream during exercise. After
exercise, a nuclear scanning camera and computer produce an image of the
coronary blood flow to the heart muscle.
Echocardiogram with Color Flow Doppler (Ultrasound Test). In this test,
ultrasound technology is used to produce real time images of the interior of the
heart muscle and valves.
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Diagnostic Procedures--Invasive
Cardiac Catheterization. A narrow, flexible tube, or catheter, is inserted
through a main artery in the leg or arm and guided into the patient's coronary
arteries, where a physician can use the catheter to perform various tests. A
non-toxic dye, or contrast agent, is released through the catheter, mixes with
the patient's blood and becomes visible on a screen.
Invasive Therapeutic Procedures
Percutaneous Transluminal Coronary Angioplasty ("PTCA"). A catheter is
inserted through a main artery in the arm or leg and guided to the coronary
arteries. A second catheter tipped with a deflated balloon is then threaded
through the first catheter into the coronary arteries and inflated to compress
the plaque against the inner walls of the artery. This procedure is also
commonly used to clear blockages in arteries supplying blood to other parts of
the body and is referred to as a peripheral angioplasty.
Installation of Stents. The effectiveness of PTCA is limited by the
tendency of treated arteries to restenose or abruptly close after treatment. To
help prevent restenosis, a tiny metal sleeve called a "stent," which serves as a
scaffold to keep clogged arteries open, is placed into a coronary artery when a
patient undergoes PTCA as an adjunct treatment.
Installation of Pacemakers.. To install a pacemaker, a generator is placed
just under the patient's skin by a small incision in the upper left part of the
chest. Lead wires are then threaded to the heart via needle puncture in a large
vein in the upper chest and then threaded to the heart under x-ray
visualization.
Atherectomy. Atherectomy utilizes the techniques of cardiac catheterization
and a variation of angioplasty to remove concentrations of plaque from coronary
arteries. A catheter tipped with a deflated balloon and a rotary shaver is
guided to the area of blockage and used to extract the plaque build-up in the
artery.
Coronary Artery Bypass Graft Surgery ("CABG"). CABG is an open heart
surgical procedure through which the flow of blood to the heart is bypassed
around sections of one or more coronary arteries that have become clogged with
plaque by using vein or artery grafts taken from other areas of the body.
Valve Replacement Surgery. Valve replacement is an open heart surgical
procedure involving the replacement of valves that regulate the flow of blood
between chambers in the heart which have become narrowed or ineffective due to
the build-up of calcium or scar tissue or the presence of some other physical
damage.
Minimally Invasive Coronary Artery Bypass ("MIDCAB"). Like CABG, MIDCAB is
done to bypass blood around clogged arteries and improve the flow of blood and
oxygen to the heart. However, small incisions in the chest are made rather than
accessing the heart by opening the chest with the sternum saw, and the procedure
is performed without the usual stoppage of the heart.
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Heart Hospitals
General
A key part of the Company's strategy is developing, co-owning with
physicians and operating Heart Hospitals dedicated to providing comprehensive
professional services to diagnose and treat heart disease. The Company
structures its ownership of Heart Hospitals through limited liability companies
and limited partnerships with local cardiologists, cardiovascular and vascular
surgeons and other physicians. MedCath owns a majority interest in the
respective limited liability company or partnership and serves as its manager.
The Company believes that these Heart Hospitals are well positioned to promote
the national policy to contain health care costs by operating with a
substantially lower cost structure than most general acute care hospitals that
offer similar care as just one of many other health care services. The Company
achieves substantially lower costs by:
o Designing the Heart Hospitals to improve patient flow, incorporate advanced
technology and create efficiencies in the performance of services by nurses
and technical personnel;
o Cross-training nursing, technical and other hospital staff members to the
greatest extent possible, enabling administrators to utilize staff
resources more productively and reduce both direct and indirect labor costs
per procedure;
o Capturing efficiencies and economies available within a facility designed
for the diagnosis and treatment of a single disease category by eliminating
unnecessary overhead frequently associated with conventional hospitals
providing a wide range of health care services; and
o Aligning the interests of the cardiologists, cardiovascular and vascular
surgeons and other physicians practicing at the Heart Hospital with the
hospital's interests to achieve the operating efficiencies required to
deliver cost-effective patient care.
The Company organizes an integrated delivery system for cardiology and
cardiovascular services in each market in which it develops a Heart Hospital.
The system is designed to permit the Company and the affiliated physicians to
respond proactively to the restructuring of the health care system away from
traditional fee-for-service based benefit plans and toward managed care
contractual arrangements under which health care providers must accept more of
the risk for the cost of care. With a substantially lower cost structure, the
Company's Heart Hospitals and related integrated delivery systems will continue
to be well positioned in their local markets to capture a significant share of
patients enrolled in HMOs and other managed care programs. By concentrating on
providing comprehensive diagnostic and therapeutic services to patients
suffering from cardiovascular diseases, the Company also believes the hospitals
will improve the quality of outcomes for patients and achieve positive marketing
benefits.
Each of the Company's Heart Hospitals is fully equipped to enable
cardiologists and cardiovascular and vascular surgeons to perform a
comprehensive range of diagnostic and therapeutic procedures from outpatient
non-invasive diagnostic tests to sophisticated surgical procedures, such as
coronary artery bypass graft surgery. In addition, the Heart Hospitals are fully
equipped to provide clinical laboratory services and diagnostic x-ray services.
The Company owns a majority interest in each of the Heart Hospitals with the
remaining investors consisting of area cardiologists, cardiovascular and
vascular surgeons and other physicians who practice at the hospital. The Company
serves as manager and employs full-time nursing, technical and administrative
and other support personnel. MedCath or a third-party lender generally provides
a new Heart Hospital with working capital advances
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through intercompany lending or a revolving line of credit. The advances are
repaid as soon as possible using the cash flows of the respective hospital.
Each of the Company's Heart Hospitals has been and will be subject to
various federal and state licensing requirements, including those related to the
Medicare and Medicaid programs, that must be satisfied in order to operate the
hospital. The Company does not expect any delays in obtaining the licenses and
certification necessary in operating its Heart Hospitals. See
"Business--Regulation."
McAllen Heart Hospital
The Company's McAllen Heart Hospital is owned and operated by MedCath of
McAllen Limited Partnership (the "McAllen Partnership"), in which MedCath owns a
majority interest and serves as the general partner. The hospital, which was
completed in December 1995 and opened in January 1996 after a Medicare and
Medicaid certification survey was completed, is a 60-bed hospital with three
surgery suites and three cardiac catheterization laboratories. A number of the
physicians who hold ownership interests in the McAllen Partnership have built a
three story medical office building which is connected to the hospital by a
covered walkway.
The total cost of developing the McAllen Heart Hospital, including land
acquisition, construction and equipment costs, was approximately $28 million.
Land and construction costs were financed primarily by a $13.8 million
seven-year mortgage loan, renewable for an additional seven years at the option
of the McAllen Partnership. Most of the equipment for the hospital, with an
aggregate cost of approximately $11 million, was acquired through five to seven
year financing arrangements with two equipment lenders.
Arkansas Heart Hospital
The Arkansas Heart Hospital, located in Little Rock, Arkansas, is owned and
operated by MedCath of Little Rock, L.L.C. (the "Little Rock Company"), in which
MedCath owns a majority interest and serves as manager. The hospital, which was
completed in February 1997, and opened in March 1997 after a Medicare and
Medicaid certification survey was completed, is an 84-bed hospital with three
surgery suites and six cardiac catheterization laboratories.
The total cost of developing the Arkansas Heart Hospital, including land
acquisition, construction and equipment costs was approximately $45 million.
Land and construction costs were financed primarily by a $29 million seven-year
mortgage loan, renewable for an additional seven years at the option of the
Little Rock Company. Most of the equipment for the hospital, with an aggregate
cost of approximately $14 million, was acquired through a five year financing
arrangement with an equipment lender.
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Tucson Heart Hospital
The Tucson Heart Hospital, located in Tucson, Arizona, is owned and
operated by MedCath of Tucson L.L.C. (the "Tucson Company"), in which MedCath
owns a majority interest and serves as manager. The Tucson Heart Hospital, which
was completed and opened in October 1997 after a Medicare and Medicaid
certification survey was completed, is a 66-bed hospital with three surgery
suites. The Tucson Heart Hospital has four cardiac catheterization laboratories
that are separately owned and operated by CCT, L.L.C. (the "Tucson Cath Lab
Company"). The Company owns a majority interest in and manages the Tucson Cath
Lab Company. The remaining interests in the Tucson Cath Lab Company are owned by
local cardiologists.
Five of the 23 physicians who own membership interests in the Tucson
Company were the owners of the Heart Institute of Tucson, a Fixed-Site Facility
managed by the Company that was located in Tucson immediately adjacent to a
general acute care hospital. See "Business--Diagnostic Services--Fixed-Site
Facilities." In February 1996, the hospital filed a civil action against the
Company alleging the Company unlawfully interfered with the hospital's
contractual rights by inducing these physicians to violate noncompetition
covenants in their agreement with the hospital. See "Business--Legal
Proceedings."
The total cost of developing the Tucson Heart Hospital, including land
acquisition, construction and equipment costs, and acquisition payments made by
the Company to the owners of, and costs incurred in connection with the closing
of, the Heart Institute of Tucson, was approximately $35 million. Land and
construction costs was financed primarily by a $20 million seven-year mortgage
loan, renewable for an additional seven years at the option of the Tucson
Company. Most of the equipment for the hospital, with an aggregate cost of
approximately $14 million, was acquired through a seven-year financing
arrangement with an equipment lender.
Arizona Heart Hospital
The Arizona Heart Hospital, to be located in Phoenix, Arizona, will be
owned and operated by a limited liability company, Arizona Heart Hospital,
L.L.C. (the "Phoenix Company") in which MedCath owns a majority interest and
serves as manager. The Arizona Heart Hospital, on which the Phoenix Company
commenced construction in May 1997, is expected to open in February 1998 and
will be a 58-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Arizona Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $52 million. Land and construction costs are being financed
primarily by a $28 million three-year mortgage loan, renewable for an additional
year at the option of the Phoenix Company. Most of the equipment for the Arizona
Heart Hospital will be acquired through financing arrangements with equipment
lenders.
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Heart Hospital of Austin
The Heart Hospital of Austin, to be located in Austin, Texas, will be owned
and operated by a limited partnership, Hospital Management IV, L.P. (the "Austin
Partnership") in which MedCath owns a majority interest and serves as the
general partner. The Heart Hospital of Austin, on which the Austin Partnership
commenced construction in August 1997, is expected to open in fiscal year 1999
and will be a 58-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Heart Hospital of Austin, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $49 million. Land and construction costs are being financed
primarily by a $35 million seven-year mortgage loan, renewable for an additional
seven years at the option of the Austin Partnership. Most of the equipment for
the Heart Hospital of Austin will be acquired through financing arrangements
with equipment lenders.
Bakersfield Heart Hospital
The Bakersfield Heart Hospital, to be located in Bakersfield, California,
will be owned and operated by a limited liability company, Heart Hospital of BK,
L.L.C. (the "Bakersfield Company") in which MedCath owns a majority interest and
serves as manager. The Bakersfield Heart Hospital, on which the Bakersfield
Company commenced construction in November 1997, is expected to open in fiscal
year 1999 and will be a 54-bed hospital with three surgery suites and four
cardiac catheterization laboratories.
The total cost of developing the Bakersfield Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $43 million. The Company has purchased approximately 11 acres of
land in Bakersfield as a site for the Bakersfield Heart Hospital and expects to
be able to obtain third-party financing for the land acquisition, construction
and other development costs of the hospital. The Company expects that most of
the equipment for the Bakersfield Heart Hospital will be acquired through
financing arrangements with equipment lenders.
Dayton Heart Hospital
The Dayton Heart Hospital, to be located in Dayton, Ohio, will be owned and
operated by a limited liability company, Heart Hospital of DTO, L.L.C. (the
"Dayton Company") in which MedCath owns a majority interest and serves as
manager. The Dayton Heart Hospital, on which the Dayton Company will commence
construction in fiscal year 1998, is expected to open in fiscal year 1999 and
will be a 48-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Dayton Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $38 million. The Company has entered into an option to purchase
approximately 10 acres of land in Dayton as a site for the Dayton Heart Hospital
and expects to be able to obtain third-party financing for the land acquisition,
construction and other development costs of the hospital. The Company expects
that most of the equipment for the Dayton Heart Hospital will be acquired
through financing arrangements with equipment lenders.
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Other Heart Hospitals
The Company is currently seeking to develop additional Heart Hospitals in
conjunction with leading cardiologists, cardiovascular and vascular surgeons and
other physicians serving targeted geographic markets. The complete development
cycle, from initial discussions with physicians through execution of agreements,
obtaining the financing for and completing construction of a hospital, can be
complex and lengthy. The Company expects to encounter opposition from
established hospitals in many of the markets in which it seeks to establish
Heart Hospitals.
Physician Practice Management
As part of the Company's strategy of establishing and maintaining fully
integrated cardiac care networks, the Company enters into long-term management
services agreements with established physician groups that include leading local
cardiologists and cardiovascular and vascular surgeons. MedCath believes the
management of established cardiology group practices will help lay the
groundwork for the Company to develop additional Heart Hospitals, diagnostic
services, and/or cardiac managed care products in selected markets.
As managed care programs continue to penetrate the market for health care
services, physicians are becoming increasingly aware of the importance of
positioning themselves to adapt to the demands of the managed care market by
associating with a business partner that has managed care skills. These skills
focus on increasing market presence, both in scope of services and geographic
breadth, improving operating efficiencies, improving the utilization of existing
clinical facilities and equipment and installing appropriate financial and
management information systems. If successful in negotiating management services
agreements, the Company anticipates that it will perform the principal financial
and administrative functions for physician groups, including billing,
recruiting, record keeping, and negotiating with HMOs and other managed care
plans for the services of the physicians.
Under the terms of the management services agreements, the Company's fees
include reimbursement of operating expenses incurred in managing the practice
plus a percentage of practice operating income, or in one instance, a percentage
of net revenue. MedCath provides most non-physician personnel required to
operate the practice, offers strategic direction, prepares financial information
regarding the operations of the practice, negotiates managed care contracts,
provides billing and collection and other management and administrative services
as well as capital for expanded and new services. The Company also agrees to
provide working capital advances to the Managed Practices, repayable from time
to time with interest from the cash flows of the respective practice. The
physicians under management are responsible for all aspects of the medical
practice at the clinic, including the hiring of physicians and the supervision
of non-physician personnel when they perform patient care services. The Managed
Practices and MedCath are required to provide insurance for themselves and their
employees and to name the other party as co-insured, and each party has agreed
to indemnify the other for losses resulting from the acts or omissions of their
respective employees.
Arizona Medical Clinic. In October 1994, MedCath acquired PhysMed
Management Services, Inc. ("PhysMed"), which, under a 40-year agreement, manages
the Arizona Medical Clinic ("AMC"), a 57-physician multi-specialty medical
clinic that serves the Sun City, Arizona area. Included in the group are three
cardiologists who are leading providers of cardiology services in the Sun City
area.
Approximately one-half of the physicians at AMC are primary care
specialists, and the balance practice various medical and surgical specialties.
The group represents approximately one half of all primary care physicians in
the Sun City market. Two AMC cardiologists were among the founders of the Sun
City Cardiac Center, a Fixed-Site Facility that the Company has managed since
November 1992.
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Mid-Atlantic Medical Specialists. In January 1996, the Company acquired
MedCath Physician Management of Virginia, Inc. ("MPMV"), which, under a 40-year
agreement manages Mid-Atlantic Medical Specialists, Inc. ("Mid-Atlantic"), a
12-physician practice that includes two cardiologists and is located in
southwest Virginia. Mid-Atlantic provides invasive cardiology, gastroenterology
and internal medicine services and since 1990, one of the physician owners of
Mid-Atlantic has been performing cardiac catheterizations in one of the
Company's Mobile Cath Labs.
Heart Clinic. In October 1996, the Company acquired a 40-year contract to
manage Heart Clinic, P.A. ("Heart Clinic") a nine member cardiologist group
located in McAllen, Texas that has four offices throughout the Rio Grande Valley
of South Texas. The Heart Clinic is the largest cardiologist group in the Rio
Grande Valley.
Pima Heart Associates. In October 1997, the Company acquired a management
service organization which changed its name to MedCath Physician Management,
Inc., ("MPM"). MPM has a 40-year contract to manage Pima Heart Associates
("Pima"), a 17-member cardiologist group located in Tucson, Arizona. Pima is a
full service cardiology group that comprises more than half of the cardiologists
in the Tucson market place.
Diagnostic Services
Fixed-Site Facilities
The Company, through affiliations with physician groups or medical
facilities, either manages or co-owns seven Fixed-Site Facilities located in
targeted geographic markets. Physicians practicing in each Fixed-Site Facility
may perform either invasive or non-invasive diagnostic procedures, and two of
the facilities also offer a broad range of invasive therapeutic procedures.
Information concerning the Fixed-Site Facilities is presented in the table
below:
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Commencement
Year of Operations Managed
Name of Fixed-Site Facility Location Founded or Management or co-owned
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Sun City Cardiac Center Sun City, AZ 1985 November 1992 Managed
Cardiac Testing Centers New Providence, NJ 1986 July 1992 Managed
Cardiac Testing Centers Summit, NJ 1994 January 1994 Managed
Heart Institute of Northern Arizona Kingman, AZ 1994 August 1994 Managed
Cape Cod Cardiology Services Hyannis, Mass 1996 September 1996 Co-owned
Cardiac Diagnostic Center Raleigh, NC 1996 October 1996 Managed
Gaston Cardiology Services Gastonia, NC 1996 November 1996 Co-owned
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The Company expects to open its eighth Fixed-Site Facility to be located in
Montgomery Alabama in fiscal year 1998.
MedCath serves as manager in all of the Fixed-Site Facilities and the
management services include providing all non-physician personnel required to
deliver patient care at these Fixed-Site Facilities and the administrative,
management and support functions required in their operation. The support
functions MedCath performs include purchasing, accounting and billing services,
hiring, scheduling and providing for the maintenance of equipment and
facilities. The physicians who practice at the Fixed-Site Facilities have
complete control over the delivery of medical services.
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MedCath co-owns two Fixed-Site Facilities through limited liability
companies and limited partnerships with acute care hospitals. MedCath owns a
majority interest in the respective venture and serves as manager. Each
Fixed-Site Facility has an agreement to provide cardiology and cardiovascular
services to the hospital investor under agreements having initial terms of 20 to
32 years, subject to extension at the option of the investors.
The Fixed-Site Facilities managed by MedCath operate under management
agreements having extended initial terms of 30 years or more and also typically
include several renewal options ranging from five to ten years each. The
physicians with whom the Company has contracted to operate the Fixed-Site
Facilities typically may terminate the agreements only for cause. In most cases
the Company may terminate the agreements for cause or upon the occurrence of
specified material adverse changes in the business of the facilities.
Sun City Cardiac Center. The Sun City Cardiac Center has two cardiac
catheterization laboratories, offers invasive diagnostic and therapeutic
services and is located in Sun City, Arizona on the campus of a nonprofit,
general acute care community hospital. By deed restriction, no other hospital
may operate in Sun City. When first established in 1985, the Sun City Cardiac
Center entered into an agreement with this hospital to provide cardiology
diagnostic and therapeutic services to its patients. The Sun City Cardiac Center
derives substantially all of its revenue from the hospital for inpatient
procedures. This center is owned by a small group of physicians, two of whom are
cardiologists affiliated with AMC, which is managed by the Company.
Heart Institute of Tucson. . The Heart Institute of Tucson was located in
Tucson, Arizona adjacent to a general acute care hospital from which it derived
substantially all if its revenues. In August of 1997, in anticipation of the
opening of the Tucson Cath Lab Company, the Heart Institute of Tucson was
closed. See "Business - Heart Hospitals - Tucson Heart Hospital." In February
1996, the adjacent hospital filed a civil action against the Company and the
Tucson Company. See "Business - Legal Proceedings"
Cardiac Testing Centers. Cardiac Testing Centers consists of two facilities
located approximately 10 miles apart in northern New Jersey which are owned by a
cardiology group practice. At each facility, Cardiac Testing Centers provides
non-invasive diagnostic procedures, including nuclear imaging tests and
echocardiograms.
The Heart Institute of Northern Arizona. The Heart Institute of Northern
Arizona is located in Kingman, Arizona and provides cardiac catheterization
procedures as well as nuclear imaging tests. There are five invasive
cardiologists practicing in Kingman, two of whom perform most of their cardiac
diagnostic procedures at the Heart Institute of Northern Arizona.
Cape Cod Cardiology Services. Cape Cod Cardiac Cath is located in Hyannis,
Massachusetts in a building attached to Cape Cod Hospital ("CCH"). MedCath and
CCH co-own this Fixed-Site Facility which under the terms of a 20-year agreement
with CCH, provides invasive cardiology and cardiovascular services to patients
at CCH. Cape Cod Cardiac Cath commenced operations in September 1996 and
replaces those previously provided to CCH through the use of one of the
Company's Mobile Cath Labs. CCH has certain rights to terminate this agreement
prior to the end of its term.
Cardiac Diagnostic Center. Cardiac Diagnostic Center is located in Raleigh,
North Carolina in a medical office building adjacent to an acute care hospital.
The Cardiac Diagnostic Center is owned by Wake Heart Associates, P.A., a group
of ten cardiologists, and provides cardiac catheterization procedures. The
Cardiac Diagnostic Center commenced operations in October 1996.
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Gaston Cardiology Services. Gaston Cardiology Services is located in
Gastonia, North Carolina in Gaston Memorial Hospital ("GMH"). MedCath and GMH
co-own this Fixed-Site Facility which provides invasive cardiology and
cardiovascular services to patients at GMH. Gaston Cardiology Services commenced
operations in November 1996 and replaces those previously provided to GMH
through the use of one of the Company's Mobile Cath Labs. GMH has certain rights
to terminate this agreement prior to the end of its term.
Mobile Cath Labs
The Company owns or operates 24 Mobile Cath Labs that serve networks of
hospitals throughout the United States or are leased to hospitals and other
medical facilities that directly operate such laboratories on their campuses.
The Mobile Cath Labs operated by the Company to service hospital networks
are moved, usually on a daily basis, from one hospital to another within each
network and are fully equipped and operated by highly skilled, non-physician
MedCath technologists and nurses to enable cardiologists to perform cardiac
catheterization procedures for hospital patients. The cardiac catheterization
procedures are performed by cardiologists located in the communities served by
the hospitals or, in some instances, by cardiologists with whom MedCath has
contracted or arranged to perform, as independent contractors, such procedures.
These Mobile Cath Labs permit a group of hospitals located in geographic
proximity to one another, each with a limited patient volume, to offer cardiac
catheterization services through shared access to equipment and personnel that
allows them to avoid substantial outlays of capital and increases in operating
expenses. Under the Company's existing contracts, the hospitals typically pay
for the use of the Mobile Cath Labs on a fixed-fee-per-procedure basis and
reimburse MedCath for certain costs incurred in performing procedures. In most
instances, the hospitals are obligated to pay a minimum monthly amount,
regardless of the number of procedures performed, while the Mobile Cath Lab is
made available to the hospital.
The Company also provides Mobile Cath Labs to hospitals or medical
facilities on an interim basis under operating leases that provide for monthly
lease payments to the Company over the terms of the respective contracts. The
interim rentals will allow hospitals to support increased demand or to refurbish
existing catheterization labs. The hospital utilizes its staff and does not rely
on MedCath to provide non-physician personnel or management and technical
expertise in the operation of the Mobile Cath Labs leased on an interim basis.
All of the Company's current contracts expire at various times prior to the
end of fiscal year 2001. While MedCath believes it will be successful in
negotiating renewals or extensions of contracts with most of the hospitals
within its Mobile Cath Lab networks or negotiating new contracts with suitable
alternate hospitals, there can be no assurance that it will be able to do so or
that newly negotiated rates will be as favorable to MedCath as those that exist
under most of its current contracts.
13
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PART I
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Regulation
The Company's business and the health care industry in general are subject
to extensive federal and state regulation. The Company believes it and its
affiliated physicians are in compliance with the laws and regulations applicable
to MedCath's business. The Company also believes that its business relationships
with physicians affiliated with the Company's operating divisions comply with
federal law which, subject to certain statutory exceptions, prohibits physicians
who have a financial relationship with an entity providing health care services
from referring or admitting patients to that entity for the furnishing of
certain designated services (the "Stark II Legislation"). However, there can be
no assurance that the enactment of future legislation or amendments to or
differing interpretations of existing laws and regulations will not restrict or
otherwise adversely affect the Company's business.
Federal Anti-Referral Laws. The Stark II Legislation prohibits, with
certain statutory exceptions, physicians who have a financial relationship with
an entity providing health care services from referring or admitting patients to
that entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations of the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition.
The Company believes the Stark II Legislation does not apply to MedCath
with respect to its physician practice management, Mobile Cath Lab activities
and certain of its Fixed-Site Facilities but that such legislation does have
potential application to its Heart Hospitals and the balance of its Fixed-Site
Facilities. MedCath believes that the physician investors in its Heart Hospitals
are not and will not be subject to the referral prohibitions of the Stark II
Legislation because they qualify for a statutory exception available to
physicians holding an ownership or investment interest in a hospital in which
they are authorized to perform services. MedCath believes the ownership
structures of the Fixed-Site Facilities with which it is affiliated and to which
the prohibitions to the Stark II prohibitions apply also comply with a statutory
exception to the prohibitions of the Stark II Legislation. Failure of the
Company, or the physician owners of facilities managed by the Company, to comply
with the Stark II Legislation could have a material adverse effect on the
Company, not only because of the potential for sanctions but also due to the
potential revenue loss from the prohibitions on physician referrals. In
addition, particularly in light of prevailing governmental policies against
physician self-referral, the Company's strategic objective of establishing
relationships with physicians, including physician ownership of health care
facilities, entails the risk that new laws or regulations will be enacted which
will require further restructuring of operations or otherwise have a material
adverse effect on the Company.
State Anti-Referral Laws. Certain states in which the Company operates or
may operate in the future have anti-referral laws similar to the Stark II
Legislation which are in some cases more restrictive than the Stark II
Legislation. Depending on their scope, these laws may restrict the ability of
the Company to expand into certain states. Although the Company has attempted to
structure its business relationships with physician groups in accordance with
these anti-referral laws, there can be no assurance that such laws ultimately
will be interpreted in a manner consistent with the Company's practices.
14
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PART I
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Federal Fraud and Abuse Laws. With certain exceptions, federal law
prohibits activities and arrangements which are designed to provide "kickbacks"
or to induce the referral of business under Medicare and Medicaid programs.
Violations of anti-kickback laws are felonies punishable by monetary fines,
civil and criminal penalties and exclusion from participation in Medicare or
Medicaid programs. The federal government has published exemptions, or "safe
harbors," for business transactions that will be deemed not to violate the
anti-kickback statute. Although satisfaction of the requirements of any of these
safe harbors generally provides a guarantee of compliance with the law, failure
to meet the safe harbor does not mean necessarily that a transaction violates
the prohibitions. These laws impose an intent-based standard of culpability, and
if the arrangement is not intended to induce referrals, there is generally no
violation.
The federal fraud and abuse laws have a sweeping scope, with potential
application to virtually all business transactions between participants in the
health care industry, which may include all of the Company's current and planned
activities. MedCath believes its physician practice management and Mobile Cath
Lab activities entail minimal risk of violation by the Company of the fraud and
abuse laws because, in carrying out such activities, MedCath neither refers
patients to other health care providers nor obtains reimbursement for its
services from Medicare or Medicaid. Although the Company has attempted to
structure its operations of Fixed-Site Facilities and Heart Hospitals to avoid
any violations of these fraud and abuse laws, there can be no assurance that
such laws ultimately will be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted which
will have a material adverse effect on the Company.
State Illegal Remuneration Laws. Certain states in which the Company
operates or may operate in the future have "illegal remuneration" laws similar
to the federal anti-kickback laws which are in some cases more restrictive than
the anti-kickback legislation and are not limited to the Medicare and Medicaid
programs. Although the Company has attempted both to structure its business
relationships with physician groups and establish its policies and procedures in
accordance with these remuneration laws, there can be no assurance that such
laws ultimately will be interpreted in a manner consistent with the Company's
practices.
Corporate Practice of Medicine. The laws of certain states in which the
Company operates or may operate in the future prohibit non-physician entities
from practicing medicine, exercising control over physicians or engaging in
certain practices such as fee-splitting with physicians. The Company has
structured its affiliations with physician groups and medical facilities so that
the physicians maintain exclusive authority regarding the delivery of medical
care, and MedCath believes its activities do not constitute the corporate
practice of medicine as contemplated by these statutes. There can be no
assurance, however, that these laws ultimately will be interpreted in a manner
consistent with the Company's practices or that other laws or regulations will
not be enacted in the future which will have a material adverse effect on the
Company.
15
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PART I
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Certificate of Need, Licensing and Medicare Certification Requirements.
Certain states in which the Company operates or may operate in the future
prohibit the establishment, expansion or modification of certain health care
facilities or services without obtaining a CON from the appropriate state
regulatory agency. Approximately two-thirds of the states have CON laws that
apply to certain of the Company's businesses. Obtaining CONs in those states is
typically an expensive and lengthy process and may involve adversarial
proceedings brought by competing facilities. The existence of these laws will
make it more difficult for the Company to build Heart Hospitals and Fixed-Site
Facilities. The inability of the Company to obtain CONs for facilities it wishes
to operate in the future could have a material adverse effect on its business.
In addition to any CON requirements which may apply, each Heart Hospital
developed by the Company will be required to comply with other licensing
requirements which vary from state to state. There can be no assurance that any
applications for the Heart Hospitals currently under development or other future
hospitals will be approved on a timely basis, or at all. Failure to obtain such
regulatory approval could have a material adverse effect on the Company.
In order to participate in the Medicare and Medicaid programs, the
Company's Heart Hospitals must obtain Medicare and Medicaid certification, a
process which cannot commence until a facility opens. Lengthy delays in the
certification process could have an adverse impact on the Company's cash flows.
In order to avoid any potential delays and to mitigate cash flow problems, the
Company intends to schedule the certification of Heart Hospitals as soon as
possible following the commencement of operations.
Historically, an agency of the government of the state in which a new
hospital or other medical facility is located has conducted the initial survey
required for the facility's Medicare and Medicaid certification in accordance
with rules established by the Health Care Financing Administration ("HCFA"), an
agency of the Department of Health and Human Services within the federal
government that sets guidelines for Medicare. In June 1996, the Department of
Human Services and HCFA agreed to accept the successful completion of an initial
survey by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a private hospital accreditation organization, for Medicare and
Medicaid certification of a new medical facility as an alternative to successful
completion of a survey done by a state government agency. This agreement gives
the Company an alternative source for obtaining Medicare and Medicaid
certification if the applicable state agency is unable to conduct its survey
when the Company is ready to open a new Heart Hospital.
16
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PART I
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Medicare Payment System. Substantially all of the Company's revenue is
derived directly or indirectly from payments made under Medicare or other
third-party payors. During 1997, the McAllen and Arkansas Heart Hospitals each
derived over 60% of their net revenue from patients enrolled in the Medicare and
Medicaid programs, and the Company expects that its other Heart Hospitals will
derive from 40% to 80% of their net revenue from patients enrolled in these
programs. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, all of which could have the effect of limiting
or reducing reimbursement levels for the hospital's services. Although the
Company's Heart Hospitals are planned to operate profitably under current levels
of reimbursement, there can be no assurance that payments under governmental
programs will remain comparable to present levels.
Health care system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for the federal and certain state
governments. In 1996, the President vetoed legislation approved by the Congress
that would have reshaped the Medicare and Medicaid programs through significant
reductions in the overall rate of spending growth in both programs. The impact
on the Company of the outcome of future negotiations between the President and
Congress over reducing the overall rate of spending growth in these programs is
not readily determinable. However, if legislation implementing reductions in the
rate of spending growth in the Medicare and Medicaid programs of substantially
the same magnitude as was vetoed by the President in 1996 is enacted into law,
such reductions could have a material adverse effect on the Company.
Competition
The fundamental restructuring of the health care system currently underway
in the United States is leading to consolidation of the existing, highly
fragmented health care delivery system into larger and more organized groups and
networks of health care service providers. In executing its business strategy,
MedCath competes with other management services organizations, PPMs, hospitals,
HMOs and others, some of which are seeking to form strategic alliances with
cardiologists and cardiovascular surgeons or provide management services to
physicians or to diagnostic and therapeutic facilities owned by them. An
increasing number of PPMs offer services similar to those the Company provides
to its Managed Practices and plans to provide to cardiology group practices or
other multi-specialty group practices with practicing cardiologists. The Company
is not aware of any other company actively pursuing a strategy of establishing
fully integrated cardiac care delivery systems incorporating specialty heart
hospitals, affiliations with cardiologists and cardiovascular surgeons and
physician practice management services.
The Company expects to encounter competition from general acute care
hospitals and free-standing cardiac diagnostic and therapeutic facilities
serving the same markets the Company operates in or seeks to enter, but believes
it will have substantial cost advantages over these competitors. In addition,
the Company believes that to compete successfully in the delivery of low cost,
high quality cardiology and cardiovascular services requires the establishment
of capital intensive facilities, such as its Heart Hospitals, which imposes a
significant barrier to entry for new competitors. Furthermore, the Company
believes that it would have a significant lead over any competitor adopting a
similar strategy.
17
<PAGE>
PART I
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Medical Malpractice Insurance
While the Company's employees are not physicians and do not practice
medicine, certain of the employees are or will be involved in the delivery of
health care services to the public under the supervision of physicians. To
protect the Company from medical malpractice claims, including claims associated
with its employees' activities, the Company, and each of its majority or
wholly-owned subsidiaries, maintain professional liability and general liability
insurance in amounts deemed appropriate by management based upon the nature and
risks of the Company's business.
Such policies provide primary general and malpractice coverage in the
amount of $1.0 million per occurrence with $2.0 million aggregate limit and
$25.0 million of umbrella coverage. The cost and availability of such coverage
has varied widely in recent years. While the Company believes its insurance
policies are adequate in amount and coverage for its current operations, there
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
Employees
As of December 15, 1997, the Company employed 1,630 people, of which 175
were engaged in managing and operating the Company's Mobile Cath Labs and
Fixed-Site Facilities, 198 in managing physician practices, 1,169 in operating
or developing the Company's five Heart Hospital projects and the remainder in
management, development, finance and administrative capacities. None of the
Company's employees are represented by a labor union.
Item 2 - Properties
The Company leases approximately 16,000 square feet of space in Charlotte,
North Carolina, where its executive offices are located. The lease expires in
2002, and the Company is evaluating its continued occupancy of this space in
light of anticipated growth.
The Company currently operates the McAllen, Arkansas and Tucson Heart
Hospitals and has under construction the Arizona and Bakersfield Heart
Hospitals. The Company owns the real property for each of these hospitals and
the sites range from 6 to 12 acres. Each of these facilities is subject to a
mortgage, and substantially all the real estate and equipment located at these
facilities is pledged as collateral to secure long-term debt. The Company leases
the five acres of land on which the Heart Hospital of Austin is being
constructed. The Company expects to own the property on which the Dayton and any
future Heart Hospitals will be constructed.
The four physician group practices that are managed by the Company each own
or lease the office space in which they are located. The Company has no
ownership interest in these facilities. The Company owns or leases certain
medical and office equipment used in the practices.
The Company co-owns two Fixed-Site Facilities through limited liability
companies or partnerships with general acute care hospitals. These hospitals
lease the building space in which the facility is located to the limited
liability companies or partnerships through operating leases.
The Company manages five Fixed-Site Facilities and in connection with the
management of these facilities, the Company leases certain of the facilities and
office space through operating leases.
18
<PAGE>
PART I
================================================================================
Item 3 - Legal Proceedings [To be Updated by Hal]
In February 1996, Hospital Corporation of Arizona, the owner of the
hospital at which the Heart Institute of Tucson is located in Tucson, Arizona,
instituted an action against the Company and the Tucson Company. The plaintiff
claims that MedCath and the Tucson Company interfered with its contractual
rights by inducing the physician owners of the Heart Institute of Tucson to
violate noncompetition covenants between those individuals and the plaintiff.
The physician owners of the Heart Institute of Tucson are five of the 23
physician members of the Tucson Company. In November 1995, the Heart Institute
of Tucson notified the hospital, in accordance with the terms of the applicable
agreements giving the Heart Institute of Tucson the right to do so, that the
Heart Institute of Tucson is terminating its relationship with the hospital
effective in July 1997. The lawsuit is pending in Superior Court of Pima County,
Arizona, and seeks unspecified monetary damages, costs and attorneys' fees.
Management believes that there is no basis for these claims, and MedCath and the
Tucson Company are defending this action vigorously. In the opinion of
management of the Company, it is unlikely that the ultimate outcome of this
litigation will have a material adverse effect on the Company's plans to develop
the Tucson Heart Hospital, the Tucson Cath Lab Company, the Company's operations
or its financial condition. There can be no assurance, however, that an adverse
outcome of any such litigation would not have a material adverse effect on the
Company, the Tucson Company or the Tucson Cath Lab Company.
On July 18, 1997, Murray Michael, filing individually and as the President
of South Texas Extracorporeal Professionals, Inc., and South Texas
Extracorporeal Professionals, Inc., filed suit in the 93rd District Court in
Hidalgo County, Texas, against the McAllen Partnership, the McAllen Heart
Hospital, McAllen Perfusion Associations, Inc. and several physicians. The
Plaintiff's Original Petition alleges that South Texas Extracorporeal
Professionals, Inc. contracted to be the exclusive provider of perfusion
services for all heart surgeries performed at the McAllen Heart Hospital for a
three year term. Plaintiff's Original Petition alleges that the named physicians
and McAllen Perfusion Associates, Inc. tortiously interfered with that contract.
The Plaintiff's Original Petition asserts other causes of action against the
defendant, including libel. Against the McAllen Heart Hospital the McAllen
Partnership Plaintiff's Original petition alleges breach of that contract.
Plaintiff's Original Petition seeks compensatory and punitive damages as well as
an accounting. The litigation is currently pending in the 93rd District Court,
Hidalgo County, Texas. The McAllen Partnership and McAllen Heart Hospital have
retained counsel to defend this litigation and are defending it. No trial date
has been set. The litigation is proceeding through the discovery and pretrial
motion process. In the opinion of management of the Company, it is unlikely that
the ultimate outcome of this litigation will have a material adverse effect on
the Company's operations or its financial condition. There can be no assurance,
however, that an adverse outcome of any such litigation would not have a
material adverse effect on the Company, the McAllen Partnership, or the McAllen
Heart Hospital.
There are no other pending legal proceedings to which the Company is a
party, which the Company believes, if adversely determined, would have a
material adverse effect on the Company.
19
<PAGE>
PART I
================================================================================
Item 4 - Submission of Matters to a Vote of Security Holders
None.
* * * * * * *
For the purposes of calculating the aggregate market value of the
shares of Common Stock of the Company held by non-affiliates, as shown on the
cover page of this report, it has been assumed that all the outstanding shares
were held by non-affiliates except for shares outstanding that are beneficially
owned by directors and executive officers of the Company. However, this should
not be deemed to constitute an admission that all directors and executive
officers of the Company are, in fact, affiliates of the Company, or that there
are not other persons who may be deemed to be affiliates of the Company. Further
information concerning shareholdings of directors, executive officers and
principal shareholders is included in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held February 18, 1998 and incorporated
herein by reference, such Proxy Statement having been or to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the Company's fiscal year ended September 30, 1997.
20
<PAGE>
PART II
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Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
The Common Stock of MedCath is traded on the Nasdaq Stock Market's
National Market under the symbol MCTH. The following table sets forth
for the fiscal periods indicated the high and low sale prices for the
Company's Common Stock as reported by the Nasdaq National Market.
Price Range
--------------------------------
High Low
---- ---
1996
----
First Quarter $25 3/4 $17
Second Quarter $30 $18 1/2
Third Quarter $42 5/8 $10 3/4
Fourth Quarter $19 1/4 $7 3/4
1997
First Quarter $17 1/2 $12 1/8
Second Quarter $16 $14
Third Quarter $16 $12 3/8
Fourth Quarter $20 1/4 $14 5/8
(b) Holders
As of December 15, 1997, there were 245 holders of record of the
Company's Common Stock and approximately 4,540 persons or entities
holding in nominee name.
(c) Dividends on the Company's Common Stock.
No cash dividends have ever been paid, and the Company does not intend
to pay any cash dividends in the foreseeable future. In October 1996,
the Company paid a dividend in the form of one Preferred Share Purchase
Right issued for each outstanding share of common stock. The Company
does not intend to pay any additional stock dividends in the
foreseeable future.
21
<PAGE>
PART II
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Item 6 - Selected Financial Data
MedCath Incorporated
Selected Consolidated Financial Data
The following table sets forth selected historical financial data and other
operating information of the Company for each of the five fiscal years ending
September 30, 1997, which are derived from the consolidated financial statements
of the Company. In April 1995, the Company acquired Healthtech Corporation in a
transaction accounted for as a pooling-of-interests. Accordingly, the financial
statements of the Company, and the selected financial data presented below, were
restated to include the accounts and the results of operations of Healthtech
Corporation. All information contained in the following table should be read in
conjunction with the consolidated financial statements and notes of the Company
included herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA Year Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data) 1993 1994 1995 (1) 1996 1997
- ------------------------------------------------------------------------ ------------- ------------- ------------- --------------
Net revenue $ 17,635 $ 25,892 $ 40,106 $ 66,191 $ 110,910
Medical supplies, personnel and other operating expenses 9,113 13,239 23,586 43,502 73,109
Depreciation and amortization expense 2,179 2,767 3,633 6,649 12,855
Provision for doubtful accounts - - - 735 2,083
Marketing, general and administrative expense 2,601 3,492 4,438 5,408 7,037
------------- ------------- ------------- ------------- --------------
Income from operations 3,742 6,394 8,449 9,897 15,826
Interest expense, net (1,235) (1,632) (8) (523) (3,018)
Minority interest in earnings of consolidated entities (654) (893) (1,530) (979) (1,539)
Equity in net earnings of unconsolidated joint venture - 93 117 104 -
------------- ------------- ------------- ------------- --------------
Income before income taxes and extraordinary item 1,853 3,962 7,028 8,499 11,269
Provision for income taxes (551) (1,497) (2,777) (3,297) (4,315)
------------- ------------- ------------- ------------- --------------
Income before extraordinary item 1,302 2,465 4,251 5,202 6,954
Extraordinary loss - - (228) - (230)
------------- ------------- ------------- ------------- --------------
Net income $ 1,302 $ 2,465 $ 4,023 $ 5,202 $ 6,724
============= ============= ============= ============= ==============
Net income per weighted average share: (3)
Income before extraordinary item $ 0.38 $ 0.73 $ 0.55 $ 0.53 $ 0.62
Extraordinary loss - - (0.03) - (0.02)
------------- ------------- ------------- ------------- --------------
Net income $ 0.38 $ 0.73 $ 0.52 $ 0.53 $ 0.60
============= ============= ============= ============= ==============
Shares used in computation 3,388 3,395 7,760 9,875 11,149
============= ============= ============= ============= ==============
Net income per share assuming dilution: (3)
Income before extraordinary item $ 0.22 $ 0.42 $ 0.51 $ 0.51 $ 0.60
Extraordinary loss - - (0.03) - (0.02)
------------- ------------- ------------- ------------- --------------
Net income $ 0.22 $ 0.42 $ 0.48 $ 0.51 $ 0.58
============= ============= ============= ============= ==============
Shares used in computation 5,832 5,918 8,381 10,193 11,686
============= ============= ============= ============= ==============
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA September 30,
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997
- ------------------------------------------------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 3,452 $ 5,466 $ 18,525 $ 61,693 $ 42,951
Working capital 2,186 2,893 17,240 64,816 47,498
Total assets 23,034 37,905 78,372 181,681 259,008
Long-term debt and capital leases, excluding
current maturities 5,810 13,198 15,734 45,896 98,863
Subordinated debt 3,766 3,842 - - -
Redeemable convertible preferred stock 6,763 6,763 - - -
Shareholders' equity 1,479 4,256 50,494 120,245 127,137
</TABLE>
<TABLE>
<CAPTION>
CASH FLOW AND OTHER DATA Year Ended September 30,
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997
- ------------------------------------------------------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 4,237 $ 6,061 $ 7,963 $ 7,115 $ 14,992
Net cash used in investing activities (7,273) (9,572) (31,299) (98,693) (55,016)
Net cash provided by financing activities 5,255 3,524 26,496 89,782 52,605
EBITDA (2) 5,921 9,161 12,082 16,456 28,681
</TABLE>
(1) Includes the results of operations of PhysMed Management Services, Inc.,
which was acquired in a purchase business combination effective October 1,
1994. See Note 3 of Notes to Consolidated Financial Statements for the year
ended September 30, 1997.
(2) EBITDA represents income from operations before depreciation, amortization,
interest, minority interests, equity in income of unconsolidated
subsidiaries and income taxes. While EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flows from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
(3) The net income per share amounts have been restated to comply with
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS 128"). For further discussion of earnings per share and the impact
of SFAS 128, see Note 16 of Notes to Consolidated Financial Statements for
the year ended September 30, 1997.
22
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Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and accompanying Notes thereto included elsewhere herein.
All references to 1995, 1996 and 1997 refer to the respective fiscal years ended
September 30, 1995, 1996 and 1997.
Introduction and Business Strategy
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. The Company believes that a
fully-integrated network incorporating leading physicians, state-of-the-art
facilities and practice management systems designed to provide high quality,
cost-effective diagnosis and treatment of cardiovascular disease offers
significant advantages to patients, providers and payors.
Key elements of the Company's strategy are to (i) focus exclusively on
cardiology and cardiovascular services, (ii) develop and operate full-service
heart hospitals, co-owned with leading local cardiac care physicians, that are
designed to have a substantially lower cost structure than conventional acute
care hospitals ("Heart Hospitals"), (iii) acquire and manage physician group
practices which include cardiologists and cardiovascular and vascular surgeons
with leading local market positions ("Managed Practices") and (iv) acquire,
develop and operate fixed-site cardiac diagnostic and therapeutic facilities
("Fixed-Site Facilities") and mobile cardiac diagnostic centers ("Mobile Cath
Labs") in selected markets. The Company believes that its strategy will enable
it to respond proactively to the restructuring of the health care system away
from traditional fee-for-service plans and towards managed care arrangements.
With the lower cost structure of its integrated cardiac care delivery systems,
the Company believes it will be well positioned in the markets it serves to
capture a significant share of patients enrolled in HMOs and other managed care
programs.
Hospital Division
Since 1994, the Company has formed numerous ventures for the purpose of
constructing and operating its specialty Heart Hospitals. The Company serves as
manager and owns a majority interest (generally 51%) in these ventures
represented by pro rata cash contributions from the Company ranging from
$730,000 to $2.0 million. Other investors in the ventures include cardiologists
and cardiovascular and vascular surgeons as well as other physicians who will
practice at the hospital. Accordingly, these ventures are included in the
Company's consolidated financial statements, and the ventures' profits and
losses are allocated to its partners or members on a pro rata basis. However, if
the cumulative losses of a venture exceed its initial capitalization, the
Company, as the only general partner or managing member, is required to
recognize 100% of the ventures' losses that otherwise would be allocated on a
pro rata basis. The Company will continue to recognize 100% of the ventures'
profits and losses to the extent it has previously recognized a disproportionate
share of the ventures losses. 23
<PAGE>
PART II
================================================================================
As of September 30, 1997, the Company operated two Heart Hospitals; the McAllen
Heart Hospital, located in McAllen, Texas, which opened in January 1996 and the
Arkansas Heart Hospital, located in Little Rock, Arkansas, which opened in March
1997. Each is a licensed general acute-care hospital having from 60 to 84 beds,
three to six cardiac catheterization labs and three surgery suites.
The Company has five other Heart Hospitals in various stages of
development. The Tucson Heart Hospital, located in Tucson, Arizona, opened in
October 1997 and the Arizona Heart Hospital, located in Phoenix, Arizona is
expected to open in February 1998. In addition, the Company expects to open
three additional hospitals in fiscal year 1999 located in Austin, Texas;
Bakersfield, California and Dayton, Ohio. These five hospitals will each have
from 48 to 66 beds, three or four cardiac catheterization labs and three surgery
suites.
Practice Management and Diagnostics Divisions
As of September 30, 1997, the Company managed three physician group
practices comprised of 79 physicians under long-term management agreements. The
Company provides most non-physician personnel required to operate the practices
and performs the primary administrative and financial services. The Company does
not enter into direct contracts with managed care companies as it pertains to
these long-term management contracts with the physicians. The Company's risk
associated with any managed care contracts entered into by the practices is
limited to the Company's participation in the practices' net revenue or net
income. The Company's fees for the services provided include reimbursement of
operating expenses plus a percentage of the net revenue or operating income of
the practices.
In October 1997, the Company acquired a contract to manage a
17-cardiologist group practice, the Company's fourth Managed Practice, through
the issuance of common stock valued at approximately $7 million.
The Company currently operates 31 Mobile Cath Labs and Fixed-Site
Facilities located throughout the United States, including two additional
Fixed-Site Facilities that opened in 1997.
24
<PAGE>
PART II
================================================================================
Results of Operations
The following table sets forth the percentages of net revenue represented
by certain items reflected in the Company's Consolidated Statements of Income.
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30,
---------------------------------------
1995 1996 1997
---- ---- ----
Net Revenue:
Diagnostics Division 75.6% 51.5% 33.0%
Practice Management Division 24.4 22.2 17.0
Hospital Division - 26.3 49.6
Other - - .4
------------- ------------ ------------
Total Net Revenue 100.0% 100.0% 100.0%
Operating Expenses:
Medical Supplies, Personnel & Other Operating Expenses 58.8 65.7 65.9
Depreciation and Amortization Expense 9.1 10.0 11.6
Provision for Doubtful Accounts - 1.1 1.9
Marketing, General and Administrative Expenses 11.0 8.2 6.3
------------- ------------ ------------
Total Operating Expenses 78.9 85.0 85.7
------------- ------------ ------------
Income From Operations 21.1 15.0 14.3
Interest Expense, Net - (.8) (2.7)
Minority Interest in Earnings of Consolidated Entities (3.8) (1.5) (1.4)
Equity in Earnings of Unconsolidated Subsidiaries .2 .2 -
------------- ------------ ------------
Income Before Income Taxes and Extraordinary Item 17.5 12.9 10.2
Provision for Income Taxes (6.9) (5.0) (3.9)
------------- ------------ ------------
Income Before Extraordinary Item 10.6 7.9 6.3
Extraordinary Loss on Early Extinguishment of Debt (.6) - (.2)
============= ============ ============
Net Income 10.0% 7.9% 6.1%
============= ============ ============
</TABLE>
1997 Compared to 1996
Net Revenue
Consolidated net revenue increased 67.6% to $110.9 million in 1997 from
$66.2 million in 1996. Of this $44.7 million increase, $37.6 million was
attributable to increased net revenue in the Hospital Division, which more than
tripled in 1997 to $55.0 million from $17.4 million in 1996. In March 1997, the
Company opened its second Heart Hospital, the Arkansas Heart Hospital, which
generated net revenue of $19.5 million and accounted for approximately 17.6% of
the consolidated net revenue. Additionally, the McAllen Heart Hospital generated
net revenue of $35.5 million in its first full year of operations, and accounted
for 32.0% of the consolidated net revenue.
25
<PAGE>
PART II
================================================================================
Net revenue in the Practice Management Division increased 28.2% to $18.8
million in 1997 from $14.7 million in 1996 accounting for $4.1 million of the
increase in consolidated net revenue. This increase was partially attributable
to the October 1996 acquisition of a contract to manage Heart Clinic, P.A.,
("Heart Clinic") and also to an increase in net revenue from existing contracts
to manage the Arizona Medical Clinic ("AMC") and Mid-Atlantic Medical
Specialists, Inc., ("Mid-Atlantic"). All other changes in net revenue of
individual Managed Practices over the prior year were not significant. The total
number of physicians under management in the Practice Management Division
increased to 79 in 1997 compared with 66 in 1996.
Net revenue in the Diagnostics Division increased 7.2% to $36.6 million in
1997 from $34.1 million in 1996 and accounted for $2.5 million of the total
increase in net revenue. This increase was attributable primarily to revenue at
two new Fixed-Site Facilities that opened in 1997. This increase in net revenue
was partially offset by the scheduled July 1997 closing of the Fixed-Site
Facility located in Tucson, Arizona.
Operating Expenses and Income from Operations
Total operating expenses increased 68.9% to $95.1 million in 1997 from
$56.3 million in 1996. The increase was attributable primarily to operating
expenses at the Arkansas and McAllen Heart Hospitals and expenses incurred in
managing physician practices in the Practice Management Division. Income from
operations increased 59.9% to $15.8 million in 1997 from $9.9 million in 1996
due to an overall increase in consolidated net revenue. Operating margins
decreased to 14.3% in 1997 from 15.0% in 1996. This decrease was primarily
attributable to the substantial growth in the Hospital Division which operates
at lower margins than those realized in the Company's other operating divisions
and to a slight decrease in margins in the Diagnostics Division.
Income from operations at the Hospital Division in 1997 was $5.3 million as
compared to a loss from operations of $616,000 in 1996. EBITDA was approximately
$13.0 million or 23.7% of hospital net revenue in 1997 as compared to $2.2
million, or 12.8% of hospital net revenue in 1996. The McAllen and Arkansas
Heart Hospitals both had positive operating income during 1997. The Arkansas
Heart Hospital experienced operating profits before interest and minority
interest beginning in April 1997, its second month of operations. Although the
Arkansas Heart Hospital had operating income in 1997, the Company expects each
of its future Heart Hospitals in development will experience operating losses in
the first six to nine months of operations, but also expects they will generate
positive EBITDA margins during this period. In 1997, the Hospital Division's
total operating loss after interest and minority interest was approximately $.07
per share, as compared to $.16 per share in 1996.
Income from operations in the Practice Management Division increased 48.2%
to $2.2 million in 1997 from $1.5 million in 1996. The increase is attributable
primarily to income from the contract to manage Heart Clinic, which was acquired
in October 1996, and increased operating income from managing Mid Atlantic,
which was acquired in February 1996. Operating margins in the Practice
Management Division increased to 11.8% in 1997 from 10.2% in 1996, primarily due
to the structure of the contract to manage Heart Clinic.
Income from operations in the Diagnostics Division was $13.0 million in
both 1997 and 1996. Operating margins in the Diagnostics Division decreased to
35.4% in 1997 from 37.5% in 1996 and EBITDA margins were 47.6% in both 1996 and
1997. The decrease in operating margins is due to additional depreciation
expense incurred on capital expenditures made for new equipment for several
mobile cath labs.
26
<PAGE>
PART II
================================================================================
Marketing, general and administrative expenses in 1997 increased 30.1% over
1996 primarily as a result of the Company's continued investment in corporate
infrastructure to accommodate growth. In 1997, the Company continued to add
personnel to the Human Resources and Information Systems department, as well as
additional finance and development personnel. 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. As a percentage of
consolidated net revenue, marketing, general and administrative expenses
decreased to 6.3% in 1997 from 8.2% in 1996, demonstrating the Company's ability
to continue growth without a corresponding increase in additional administrative
costs.
Interest Expense and Interest Income
Interest expense in 1997 increased $3.1 million over 1996 primarily as the
result of interest incurred on borrowings at the Arkansas and McAllen Heart
Hospitals. Substantially all of the property, plant and equipment at the
hospitals was financed using borrowings that bear interest at rates ranging from
8.50% to 11.54%. Consolidated long-term debt and capital leases increased to
$105.0 million in 1997 from $48.2 million in 1996 primarily due to borrowings in
the Hospital Division. Interest income increased $634,000 in 1997 compared with
1996 due to investment income earned on an increase in average short-term
investment balances.
1996 Compared to 1995
Net Revenue
Consolidated net revenue increased 65.0% to $66.2 million in 1996 from
$40.1 million in 1995. Of this $26.1 million increase, $17.4 million was
attributable to net revenue at the McAllen Heart Hospital.
In January 1996, the Company opened its first Heart Hospital, the McAllen
Heart Hospital, located in McAllen, Texas. The hospital generated net revenue of
$17.4 million and accounted for approximately 26% of the consolidated net
revenue. Operating expenses incurred at the McAllen Heart Hospital accounted for
a majority of the increase in consolidated operating expenses from 1995. Loss
from operations in 1996, before interest and minority interest, was
approximately $616,000. Although the hospital experienced operating losses,
EBITDA at the hospital was approximately $2.2 million, or 12.8% of net revenue.
In 1996, the McAllen Heart Hospital's total operating loss after interest and
minority interest was approximately $.16 per share. Included in this total
operating loss was approximately $.05 per share which represented the required
recognition of a disproportionate share of the hospital's losses because the
cumulative losses of the hospital exceeded its initial capitalization.
Net revenue in the Practice Management Division increased 50.1% to $14.7
million in 1996 from $9.8 million in 1995 accounting for $4.9 million of the
increase in consolidated net revenue. This increase was attributable to the
acquisition in February 1996 of a contract to manage Mid-Atlantic and also to an
increase in net revenue from the existing contract to manage AMC. The total
number of physicians under management in the Practice Management Division
increased to 66 in 1996 compared with 51 in 1995.
Net revenue in the Diagnostics Division increased 12.5% to $34.1 million in
1996 from $30.3 million in 1995 and accounted for $3.8 million of the increase
in consolidated net revenue. This was the result of higher procedure volumes
performed at the Fixed-Site Facilities and Mobile Cath Labs as well as the
addition of several new hospital contracts on several Mobile Cath Labs. The
number of Fixed-Site Facilities and Mobile Cath Labs operated by the Company
increased to 29 in 1996 compared with 28 in 1995.
27
<PAGE>
PART II
================================================================================
Operating Expenses and Income from Operations
Consolidated operating expenses increased 77.8% to $56.3 million in 1996
from $31.7 million in 1995. The increase was attributable primarily to operating
expenses at the McAllen Heart Hospital and expenses incurred in managing
Mid-Atlantic. Income from operations increased 17.1% to $9.9 million in 1996
from $8.4 million in 1995. Operating margins decreased to 15% in 1996 from 21.1%
in 1995 and was attributable to the operating losses experienced at the McAllen
Heart Hospital during the first nine months of operations.
Income from operations in the Practice Management Division increased 49.5%
to $1.5 million in 1996 from $1.0 million in 1995. The increase is attributable
to income from managing Mid-Atlantic and increased operating income from
managing AMC. Operating margins in the Practice Management Division were 10.2%
in both 1996 and 1995.
Income from operations in the Diagnostics Division increased 22.2% to $13.0
million in 1996 from $10.6 million in 1995. The increase is due primarily to
increased procedure volumes in the Mobile Cath Labs and Fixed-Site Facilities
managed by the Company in both years. Operating margins in the Diagnostics
Division improved to 37.5% in 1996 from 34.7% in 1995 and EBITDA margins
improved to 47.6% in 1996 from 45.8% in 1995. This overall improvement in
margins was due to continuing efficiencies in operating Mobile Cath Labs
resulting from the April 1995 acquisition of HealthTech.
Marketing, general and administrative expenses in 1996 increased 21.9% over
1995 primarily as a result of the Company's continued investment in corporate
infrastructure to accommodate growth. In 1996, the Company added both a Human
Resources and an Information Systems department, as well as additional finance
and development personnel. 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.
Interest Expense and Interest Income
Interest expense in 1996 increased $1.2 million over 1995 primarily as the
result of interest incurred on borrowings at the McAllen Heart Hospital.
Substantially all of the property, plant and equipment at the hospital was
financed using borrowings that bear interest at rates ranging from 8.54% to
10.19%. The increase in interest expense at the McAllen Heart Hospital was
offset partially by a reduction in interest expense on capital leases and
corporate borrowings due to the retirement of these obligations using a portion
of the proceeds from a public offering of common stock in April 1996. Interest
income increased $636,000 in 1996 compared with 1995 due to additional
investment income earned on the remaining proceeds.
Liquidity and Capital Resources
Operating Cash Flows
Net cash provided by operating activities was $8.0 million, $7.1 million
and $15.0 million in 1995, 1996 and 1997, respectively. Accounts receivable
increased $12.0 million in 1997, due primarily to operations at the Arkansas and
McAllen Heart Hospitals. At September 30, 1997, the Company had working capital
of $47.5 million, including $43.0 million of cash and short-term investments and
$22.4 million of accounts receivable.
28
<PAGE>
PART II
================================================================================
Investing Cash Flows
The Company used $31.3 million, $98.7 million, and $55.0 million in
investing activities in 1995, 1996 and 1997, respectively. In 1995, the Company
used $15.2 million for construction and start-up costs related to the McAllen
Heart Hospital, purchased $9.7 million of short-term investments and used $6.4
million to expand the Practice Management and Diagnostics Divisions through
capital expenditures, additional investments and working capital advances.
In 1996, the Company used $17.0 million, $21.7 million and $5.1 million in
the McAllen, Arkansas and Tucson Heart Hospitals, respectively, in 1996 for land
and equipment acquisitions, construction costs incurred and start-up and other
development costs incurred prior to opening the hospitals. The remaining
investing activities consisted of $9.9 million to further expand the Company's
Practice Management and Diagnostics Divisions and $45.0 million to purchase
short-term investments using the remaining proceeds of a public offering of
common stock in April 1996.
In 1997, the Company invested $80.6 million in the Hospital Division,
primarily at the Arkansas, Tucson, and Arizona Heart Hospitals for land
acquisition, construction costs, equipment purchases and pre-opening and other
development costs. The remaining investing activities consisted of $5.7 million
used to further expand the Company's Practice Management and Diagnostics
Divisions. A significant portion of these investing activities was provided for
by the Company's sale of short-term investments totaling $31.3 million.
Financing Cash Flows
In 1995, the Company issued 2.3 million shares of common stock through its
initial public offering and used the proceeds of approximately $28.9 million to
retire existing debt and to fund a portion of the development and construction
costs of the McAllen Heart Hospital. In addition, the Company used proceeds of
the long-term borrowings to fund a portion of the land acquisition and
construction costs of the McAllen Heart Hospital.
In 1996, the Company issued 2.3 million shares of common stock through a
public offering and used a portion of the net proceeds of approximately $62.5
million to retire existing debt and obligations under capital leases. The
remaining proceeds have been and will be used to fund (i) a portion of the
construction and pre-opening expenses of Heart Hospitals and Fixed-Site
Facilities, (ii) potential future acquisitions, (iii) working capital and (iv)
general corporate purposes.
In July 1997, the Company terminated its existing revolving credit facility
and entered into a $20 million, unsecured revolving credit facility (the
"Revolver") with a bank, the proceeds of which are to be used for general
corporate purposes. The Revolver matures on July 28, 1999. Borrowings under the
Revolver bear interest at variable rates based, at the Company's option, on the
bank's base rate plus 1/2% or the London Interbank Offered Rate ("LIBOR") plus 1
1/2%. Amounts available under the Revolver are subject to a borrowing base which
includes, as its primary component, a percentage of the Company's eligible
accounts receivable. Under this borrowing base, at September 30, 1997, there was
approximately $18 million available under the Revolver. The Company has no
outstanding balance.
29
<PAGE>
PART II
================================================================================
The Company entered into mortgage loans with real estate investment trusts
("REITs") from 1994 to 1996 for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas and Tucson Heart Hospitals
(collectively the "REIT Loans"). The interest rates are based on a fixed premium
above the seven-year treasury note rate and the principal and interest is
payable monthly over a seven year term using extended period amortization
schedules. As of September 30, 1997, the interest rates on the REIT Loans ranged
from 9.50% to 11.54%.
In July 1997, the Company obtained a financing commitment from a REIT 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 monthly over a seven year term using an extended period
amortization schedule. The Company completed the transaction in November 1997.
In August 1997, the Company entered into a mortgage loan with a bank for
the purpose of financing a portion of the land acquisition and construction
costs of the Arizona Heart Hospital (the "Phoenix Loan"). Borrowings of up to
$28 million are available and the term is for three years, subject to extension
for an additional year, at the option of the Company. Principle and interest are
payable monthly beginning in the third year using an extended period
amortization schedule. The interest rate on the Phoenix Loan is based on a
premium above LIBOR. As of September 30, 1997, the rate was 8.50%, and the
outstanding balance was $11 million.
The Company has acquired substantially all of the medical and other
equipment for the McAllen, Arkansas and Tucson Heart Hospitals under installment
notes payable to equipment lenders secured by the related equipment. 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 ranging from
8.50% to 10.75%.
The Company anticipates that the cost of its Heart Hospitals currently
under development will range from $32 to $52 million, and will be financed
through a combination of (i) REIT financing, (ii) bank financing, (iii) notes
payable to various equipment lenders and (iv) available cash reserves.
In October 1996, the Company entered into a 40-year contract to manage
Heart Clinic, a multi-physician cardiologist group located in McAllen, Texas.
Total consideration given in connection with the acquisition of the management
contract was approximately $6.4 million (subject to increase if certain base
performance levels are exceeded by the physicians) and consisted of fixed and
contingent promissory notes that are partially convertible into shares of the
Company's common stock.
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, capital contributions by minority
partners, 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 year 1998. 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.
30
<PAGE>
PART II
================================================================================
General Trends and Business Outlook
Revenue trends
Future trends for revenue and profitability are difficult to predict;
however, the Company believes that there will be continuing pressure to reduce
costs and develop integrated healthcare delivery systems with geographically
concentrated service capabilities. The largest disease category is
cardiovascular disease which, according to the American Heart Association, is
estimated to account for approximately $158 billion in total medical treatment
costs in 1997. The Company believes that the demand for cardiology and
cardiovascular services will increase in the future as people age 55 and older,
the primary users of such services, represent a growing proportion of the total
population. By focusing on cardiovascular disease, through the operation of
Heart Hospitals, Fixed-Site Facilities, Mobile Cath Labs and Managed Practices,
the Company believes it is well positioned to adapt to these demands by
providing fully-integrated cost effective networks focused on cardiovascular
disease.
The Company expects each of its future Heart Hospitals will experience
negative cash flow during the development phase, and operating losses in the
first six to nine months of operations. Some Heart Hospitals are expected to
become profitable faster than others, however, the Company expects each will
generate positive EBITDA margins during this period.
Health care reform
In recent years, there have been intense national, state and private
industry efforts to reform the healthcare delivery and payment systems and as
such, the healthcare industry faces increased uncertainty. While the Company is
unable to predict which, if any, proposals for healthcare reform will be
adopted, it continues to monitor their progress and analyze their potential
impacts in order to formulate its future business strategies.
Seasonality
The Company's business experiences some degree of seasonality due to the
location of significant operations. Several of the Company's Fixed-Site
Facilities and Managed Practices, as well as the McAllen Heart Hospital, are
located in regions subject to seasonal population shifts to and from warmer
climates. In addition, because patients and physicians have some discretion in
scheduling elective diagnostic or therapeutic procedures, volumes are generally
affected by vacation schedules of both the patients and the physicians.
Consequently, the Company's third and fourth fiscal quarter procedure volumes
and net revenues tend to be lower at these facilities.
Technological advances
The market for cardiovascular care is rapidly growing and subject to rapid
technological change. As pressures from third party payors to contain costs
continue, technological advances in the delivery of cardiac care will impact the
Company's strategy. The Company believes that cash flows generated by the
Company's operations together with borrowings available under the Revolver and
other third party financing sources will be sufficient to meet the Company's
cash needs to adapt to any major technological changes.
31
<PAGE>
PART II
================================================================================
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the extent of the necessary
modifications to its computer software.
Inflation
The healthcare industry is very labor intensive and salaries and benefits
are subject to inflationary pressures as are supply costs which tend to escalate
as vendors pass on the rising costs through price increases. There can be no
assurance that the Company will not be affected by inflation in the future.
Management believes that by adhering to cost containment policies, labor
management, and reasonable price increases, the effects of inflation, which has
not had a material impact on the results of operations during the last three
years, on future operating margins should be manageable.
Newly Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), was issued and will be adopted by the Company on October 1, 1998. SFAS
131 requires that a public company report financial and descriptive information
about its reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The financial information to be
reported include segment profit or loss, certain revenue and expense items and
segment assets and reconciliations to corresponding amounts in the general
purpose financial statements. SFAS 131 also requires information about products
and services, geographic areas of operation, and major customers. The Company
has not completed its analysis of the effect of adoption on its financial
statement disclosure, however, the adoption of SFAS 131 will not effect results
of operations or financial position.
In November 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on issue 97-2, Consolidation of
Physicians' Practice Entities. This pronouncement provides guidance on the issue
of consolidating a physician practice if an owning member meets all of several
criteria concerning control over the physician practice and a financial interest
in the physician practice. The consensus requires that it be applied to existing
investments no later than for financial statements issued for fiscal years
ending after December 15, 1998. The Company is currently assessing the impact of
the issue on its financial statements.
In December 1997, the Accounting Standards Executive Committee cleared its
Statement of Position (the "SOP"), Reporting on the Costs of Start-Up
Activities. The SOP is effective for most entities for fiscal years beginning
after December 15, 1998. The SOP will require entities to charge to expense
start-up costs, including organizational costs, as incurred. In addition, the
SOP will require most entities upon adoption to write-off as a cumulative change
in accounting principle any previously capitalized start-up or organizational
costs. When adopted, this SOP will require the Company to change its accounting
method for these costs.
32
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PART II
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Other
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, including
without limitation, unanticipated delays in construction and licensing;
increased construction costs; operating losses and negative cash flows during
the initial operation of heart hospitals continuing longer than anticipated;
dependence on physician relationships; increased competition from existing
hospitals in the marketplace; dependence on the availability and terms of
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.
33
<PAGE>
PART II
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Item 8 - Financial Statements and Supplementary Data
Report of Independent Auditors
The Board of Directors and Shareholders
MedCath Incorporated
We have audited the accompanying consolidated balance sheets of MedCath
Incorporated as of September 30, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 1997. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MedCath
Incorporated at September 30, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
ERNST & YOUNG LLP
Charlotte, North Carolina
November 7, 1997, except for
Note 16, as to which the date is April 9, 1998.
34
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PART II
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MedCath Incorporated
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1995 1996 1997
-------------------------------------
<S> <C> <C> <C>
Net revenue $ 40,106 $ 66,191 $ 110,910
Operating expenses:
Medical supplies and other 14,611 25,192 43,123
Personnel costs 8,975 18,310 29,986
Depreciation 2,886 4,543 8,385
Amortization 747 2,106 4,470
Provision for doubtful accounts - 735 2,083
Marketing, general and administrative 4,438 5,408 7,037
-------------------------------------
Total operating expenses 31,657 56,294 95,084
-------------------------------------
Income from operations 8,449 9,897 15,826
Interest expense (956) (2,107) (5,236)
Interest income 948 1,584 2,218
Minority interest in earnings of consolidated entities (1,530) (979) (1,539)
Equity in net earnings of unconsolidated joint venture 117 104 -
-------------------------------------
Income before income taxes and extraordinary item 7,028 8,499 11,269
Provision for income taxes (2,777) (3,297) (4,315)
-------------------------------------
Income before extraordinary item 4,251 5,202 6,954
Extraordinary loss on early extinguishment of debt (net of tax) (228) - (230)
-------------------------------------
Net income $ 4,023 $ 5,202 $ 6,724
=====================================
Net income per weighted average share:
Income before extraordinary item $ 0.55 $ 0.53 $ 0.62
Extraordinary loss (0.03) - (0.02)
-------------------------------------
Net income $ 0.52 $ 0.53 $ 0.60
=====================================
Net income per share assuming dilution:
Income before extraordinary item $ 0.51 $ 0.51 $ 0.60
Extraordinary loss (0.03) - (0.02)
-------------------------------------
Net Income $ 0.48 $ 0.51 $0.58
======= ====== =====
</TABLE>
See accompanying notes.
35
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PART II
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MedCath Incorporated
Consolidated Balance Sheets
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
As of September 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,026 $ 17,607
Short-term investments 56,667 25,344
Accounts receivable, net of allowance of $417 and $1,489
in 1996 and 1997, respectively 10,402 22,360
Medical supplies 1,549 3,168
Prepaid expenses and other current assets 610 668
-------- --------
Total current assets 74,254 69,147
Property, plant and equipment, net of accumulated depreciation 72,304 139,185
Other assets 1,910 2,470
Organization and start-up costs, net of accumulated amortization of
$1,470 and $4,881 in 1996 and 1997, respectively 7,628 13,737
Advances to physician groups 6,363 8,194
Intangible assets, net of accumulated amortization of $1,781 and
$2,308 in 1996 and 1997, respectively 19,222 26,275
-------- --------
Total assets $181,681 $259,008
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,861 $ 4,818
Distribution payable to minority interests 629 1,081
Accrued liabilities 3,624 9,648
Current portion of long-term debt 1,931 5,503
Current portion of obligations under capital leases 393 599
-------- --------
Total current liabilities 9,438 21,649
Deferred income taxes 2,625 3,731
Long-term debt 43,842 96,703
Obligations under capital leases 2,054 2,160
-------- --------
Total liabilities 57,959 124,243
Minority interests in equity of consolidated entities 3,477 7,628
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
and 11,121,326 and 11,168,603 shares issued and outstanding
at September 30, 1996 and 1997, respectively 111 112
Paid-in capital 108,898 109,065
Retained earnings 11,236 17,960
-------- --------
Total shareholders' equity 120,245 127,137
-------- --------
Total liabilities, minority interests and shareholders' equity $181,681 $259,008
======== ========
</TABLE>
See accompanying notes.
36
<PAGE>
PART II
================================================================================
MedCath Incorporated
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------------
Shares Par Paid- in Retained
(000's) Value Capital Earnings Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 3,395 $ 34 $ 1,177 $ 3,046 $ 4,257
Net income - - 4,023 4,023
Issuance of Common Stock 650 6 6,994 - 7,000
Issuance of Common Stock 2,300 23 28,904 - 28,927
Conversion of redeemable convertible preferred stock 2,288 23 6,740 - 6,763
Exercise of stock options 52 1 188 - 189
Equity distribution of pooled entity - - (318) (318)
Pro forma tax provision of pooled entity - - 212 212
Adjustments to conform fiscal year end and
accounting policies of pooled entity - - (558) (558)
Transfer of undistributed S Corporation earnings
of pooled entity to paid-in capital - 371 (371) -
--------------------------------------------------------------------
Balance at September 30, 1995 8,685 87 44,374 6,034 50,495
Net income - - 5,202 5,202
Issuance of Common Stock 96 1 1,899 - 1,900
Issuance of Common Stock 2,300 23 62,467 - 62,490
Exercise of stock options 41 - 158 - 158
--------------------------------------------------------------------
Balance at September 30, 1996 11,122 111 108,898 11,236 120,245
Net income - - 6,724 6,724
Exercise of stock options 47 1 167 - 168
--------------------------------------------------------------------
Balance at September 30, 1997 11,169 $ 112 $ 109,065 $ 17,960 $ 127,137
====================================================================
</TABLE>
See accompanying notes.
37
<PAGE>
PART II
================================================================================
MedCath Incorporated
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Income before extraordinary item $ 4,251 $ 5,202 $ 6,954
Adjustments to reconcile income before extrordinary item to
net cash provided by operating activities:
Depreciation and amortization 3,732 6,771 12,892
Equity in net earnings of unconsolidated joint venture (117) (104) --
Minority interest -- (765) (765)
Deferred income taxes 483 327 1,107
Current tax benefit of extraordinary loss 140 -- 143
Pro forma tax provision of pooled entity 212 -- --
(Increase) decrease in current assets:
Accounts receivable (1,281) (5,530) (11,943)
Medical supplies 126 (1,137) (1,619)
Prepaid expenses and other current assets 150 (366) (5)
Increase (decrease) in current liabilities:
Accounts payable 274 1,897 1,919
Distribution payable to minority interest 471 (182) 452
Accrued liabilities (301) 1,067 5,962
Other (177) (65) (105)
-------- -------- --------
Net cash provided by operating activities 7,963 7,115 14,992
Investing activities
Purchases of property, plant and equipment (16,233) (44,978) (75,452)
Proceeds from sale of assets 353 804 542
Organization and Start-up costs (2,368) (6,562) (9,598)
Advances to physician groups (2,693) (3,456) (2,624)
Repayments of advances to physician groups -- 463 793
Net (purchases) sales of short-term investments (9,703) (44,964) 31,323
Acquisition of management contracts (655) -- --
-------- -------- --------
Net cash used in investing activities (31,299) (98,693) (55,016)
Financing activities
Proceeds from issuance of long-term debt 11,824 38,181 53,718
Repayments of long-term debt (9,915) (6,252) (4,646)
Repayments of obligations under capital leases (1,876) (4,194) (530)
Proceeds from issuance of common stock 29,116 62,648 168
Investments by minority partners 2,445 376 4,916
Payment of loan acquisition costs and deferred loan fees (472) (977) (1,021)
Repayments of subordinated debt (4,225) -- --
Distributions to shareholders of pooled entity (318) -- --
Distributions to minority partners (83) -- --
-------- -------- --------
Net cash provided by financing activities 26,496 89,782 52,605
-------- -------- --------
Net increase (decrease) in cash and equivalents 3,160 (1,796) 12,581
Adjustment for the effect on cash flows of pooled
entity's different fiscal year 196 -- --
Cash and cash equivalents, beginning of year 3,466 6,822 5,026
-------- -------- --------
Cash and cash equivalents, end of year $ 6,822 $ 5,026 $ 17,607
======== ======== ========
</TABLE>
See accompanying notes.
38
<PAGE>
PART II
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. Key elements of the Company's
strategy are to (i) focus exclusively on cardiology and cardiovascular services,
(ii) develop and operate full-service heart hospitals, co-owned with leading
local cardiac care physicians, that are designed to have a substantially lower
cost structure than conventional acute care hospitals ("Heart Hospitals"), (iii)
acquire and manage physician group practices which include cardiologists and
cardiovascular surgeons with leading local market positions ("Managed
Practices") and (iv) acquire, develop and operate fixed-site cardiac diagnostic
and therapeutic facilities ("Fixed-Site Facilities") and mobile cardiac
diagnostic centers ("Mobile Cath Labs") in selected markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its 50% or greater owned subsidiaries which the Company controls. All
intercompany accounts and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates in which the Company owns 20% or more
and has significant influence over the affiliates' operating and financial
policies are accounted for using the equity method of accounting and other
investments are stated at cost.
The Company does not have exclusive authority over all decision making related
to ongoing, major, or central operations of the Managed Practices, compensation
of the licensed medical professionals, and does not have the ability to
establish and implement guidelines for the selection, hiring, and firing of the
licensed medical professionals. Accordingly, the Company does not have a
controlling financial interest in the Managed Practices as defined by Emerging
Issues Task Force No. 97-2 "Consolidation of Physicians' Practice Entities", and
therefore does not include the Managed Practices in the Consolidated Financial
Statements of the Company.
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments with maturities
of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are recorded at fair value and consist of investments in
pooled investment accounts, managed by financial institutions, which invest
primarily in government-backed debt securities. On October 1, 1994, the Company
adopted Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). In accordance
with the provisions of SFAS 115, such securities would be classified as
"available for sale" and, accordingly, would be reflected at estimated market
value, with a corresponding adjustment to stockholders' equity. The difference
between the estimated market value and cost for these securities at September
30, 1995, 1996 and 1997, was not significant.
39
<PAGE>
PART II
================================================================================
Medical Supplies
Medical supplies consist primarily of laboratory and surgical supplies, contrast
media and catheters and are stated at the lower of first-in, first-out (FIFO)
cost or market.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided for
on the straight-line method over estimated useful lives of three to nine years
for equipment and forty years for buildings and improvements.
Interest expense incurred in connection with the construction of Heart Hospitals
is capitalized as part of the cost of the building until the facility is
operational, at which time depreciation begins using the straight-line method
over the life of the building.
Other Assets
Other assets consist primarily of the costs associated with obtaining long-term
financing, net of accumulated amortization, and are amortized to interest
expense over the life of the related debt agreements.
Organization and Start-Up Costs
Organization costs are amortized using the straight-line method over five years.
Start-up costs incurred prior to the opening of Heart Hospitals and other new
facilities are capitalized and amortized using the straight-line method over two
to three years beginning with the commencement of operations.
Advances to Physician Groups
Advances to physician groups consist of working capital advances made to
unconsolidated physician groups managed by the Company in accordance with the
terms of the related management agreements.
Intangible Assets
Intangible assets consist of amounts paid to acquire certain contracts to manage
Fixed-Site Facilities and Managed Practices, the value assigned to a Certificate
of Need ("CON") exemption and the excess of cost of acquired assets over fair
value ("goodwill"). Amortization is provided for using the straight-line method.
Intangible assets relating to management contracts are amortized over the terms
of the respective contracts, which range from 30 to 40 years, the CON exemption
is amortized over eight years, and goodwill is amortized over 40 years. The
carrying value of intangible assets is reviewed if the facts and circumstances
suggest that the asset may be impaired. If this review indicates that the value
of the intangible asset will not be recoverable, as determined based on the
undiscounted cash flows of the entity or management agreement acquired over the
remaining amortization period, the Company's carrying value of the intangible
asset is reduced by the estimated shortfall of cash flows. In addition, the
Company assesses long-lived assets for impairment under Statement of Financial
Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). Under those rules,
intangibles associated with assets acquired in a purchase business combination
are included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Income Taxes
Deferred income taxes are provided for under the liability method based on
temporary differences that arise due to differences between tax bases of assets
or liabilities and their reported amounts in the financial statements.
40
<PAGE>
PART II
================================================================================
Revenue Recognition
In the Company's Fixed-Site Facilities under management, the Company's
management fee is based on a percentage of the facilities' net income, ranging
from 55% to 90%, plus the reimbursement of certain operating expenses. The total
net revenue derived from the Company's Fixed-Site Facilities under management
represented 22%, 15%, and 9% of the Company's consolidated net revenue for the
fiscal years ended September 30, 1995, 1996, and 1997, respectively. The
financial statements of the co-owned Fixed-Site Facilities are included in the
Consolidated Financial Statements since the Company's ownership percentage in
the facilities ranges from 51% to 60%.
The Company's management fee for the services provided to all but one of the
Managed Practices is calculated as a percentage of operating income of the
practice, ranging from 15% to 20%, plus reimbursement of certain expenses
incurred in managing the practice. In one of the Managed Practices, the
Company's management fee for the services provided is calculated as
approximately 4% of the net revenue of the practice, plus reimbursement of
certain expenses incurred in managing the practice. The total net revenue
derived from the Company's Managed Practices represented 24%, 22% and 17%, of
the Company's consolidated net revenue for the fiscal years ended September 30,
1995, 1996, and 1997 respectively. The Company's risk associated with any
managed care contracts entered into by the practices is limited to the Company's
participation in the practices' net revenue or net income.
The Company's Heart Hospitals have agreements with third party payors that
provide for payments to the hospitals at amounts different from their
established rates. Payment arrangements include prospectively determined rates
per discharge, reimbursed costs, and discounted charges. Net revenue is reported
at the estimated net realizable amounts from patients, third-party payors, and
others as services are rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors. Retroactive adjustments
are accrued on an estimated basis in the period that the related services are
rendered and adjusted in future periods as final settlements are determined. In
1996 and 1997, net revenue from Medicare and Medicaid patients represented
approximately 19% and 36% of consolidated net revenue, respectively.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and it is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid programs.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the SFAS 128 requirements.
Newly Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"), was
issued and will be adopted by the Company on October 1, 1998. SFAS 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The financial information to be
reported include segment profit or loss, certain revenue and expense items and
segment assets and reconciliations to corresponding amounts in the general
purpose financial statements. SFAS 131 also requires information about products
and services, geographic areas of operation, and major customers. The Company
has not completed its analysis of the effect of adoption on its financial
statement disclosure, however, the adoption of SFAS 131 will not effect results
of operations or financial position.
41
<PAGE>
PART II
================================================================================
Use of Estimates
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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. Business Combinations
In October 1994, the Company acquired all the outstanding stock of PhysMed
Management Services Inc. ("PhysMed"), a newly formed management services
organization, in exchange for 650,424 shares of the Company's common stock
valued at approximately $7 million. PhysMed has a 40-year contract to manage
Arizona Medical Clinic ("AMC"), a multi-physician practice which includes
several cardiologists serving the Sun City, Arizona area. Under the terms of the
management contract, the Company's fees include reimbursement of expenses plus a
percentage of the net revenue of AMC.
This acquisition has been accounted for under the purchase method of accounting,
and the results of operations have been included in the consolidated financial
statements since the acquisition date.
In April 1995, the Company acquired all of the outstanding shares of HealthTech
Corporation ("HealthTech"), which operated ten Mobile Cath Labs, in exchange for
1 million shares of the Company's common stock in a transaction accounted for as
a pooling-of-interests.
Net revenue, net income and net income per share for the Company and HealthTech
for the period presented prior to the pooling are as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended March
31, 1995
------------------------
(unaudited)
Net revenue:
MedCath $ 16,076
HealthTech 3,980
------------------------
Combined $ 20,056
========================
Net income:
MedCath $ 1,494
HealthTech 556
Pro forma tax provisions (212)
------------------------
Combined $ 1,838
========================
Combined per share data assuming dilution:
Income before extraordinary item $ 0.26
------------------------
Net Income $ 0.23
========================
</TABLE>
42
<PAGE>
PART II
================================================================================
Prior to the pooling, HealthTech was an S Corporation and was therefore not
subject to U.S. Federal and State income taxes. A pro forma income tax provision
is reflected to provide for additional federal and state income taxes which
would have been incurred had HealthTech been taxed as a C Corporation. An
adjustment to retained earnings of $300,000 was recorded in 1995 to conform
accounting policies by recording deferred taxes upon HealthTech's termination of
S Corporation status.
Costs and other expenses related to the pooling amounting to approximately
$315,000 were charged to expense and decreased net income and net income per
share for the year ended September 30, 1995, by approximately $190,000 and $.02,
respectively.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
September 30,
------------------------------------
1996 1997
------------------------------------
Land $ 8,057 $ 16,237
Building 15,733 42,528
Medical equipment 39,233 66,972
Equipment held under capital leases 2,447 1,284
Office equipment 1,759 4,754
Construction in progress 17,072 27,352
------------------------------------
84,301 159,127
Less accumulated depreciation (11,997) (19,942)
------------------------------------
$ 72,304 $ 139,185
====================================
</TABLE>
Substantially all of the Company's property, plant and equipment is pledged as
collateral for various long-term obligations as described in Note 6.
Effective May 1, 1995, the Company changed its estimate of the remaining useful
lives of certain lab and x-ray equipment acquired through the
pooling-of-interests with HeathTech from five years to nine years. The Company
believes this change better reflects the actual economic life of the assets,
conforms to American Hospital Association guideline lives for these assets and
is consistent with the lives used for similar equipment by the Company. This
change in estimate increased income before extraordinary item and net income for
the year ended September 30, 1995 by approximately $182,000 ($.02 per share).
43
<PAGE>
PART II
================================================================================
5. Supplementary Information
Accounts Receivable
Accounts receivable, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
September 30,
------------------------------------
1996 1997
------------------------------------
Receivables, principally from billings to hospitals for various
cardiology procedures $ 2,272 $ 2,896
Receivables, principally from patients and third party payors 4,983 14,130
Amounts under management contracts 1,870 3,283
Other 1,277 2,051
------------------------------------
$ 10,402 $ 22,360
====================================
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
September 30,
------------------------------------
1996 1997
------------------------------------
Compensation and other payroll related benefits $ 2,514 $ 3,448
Vendor accruals 343 1,915
Property taxes 206 773
Other 561 3,512
------------------------------------
$ 3,624 $ 9,648
====================================
6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
September 30,
------------------------------------
1996 1997
------------------------------------
The REIT Loans (as defined below) $ 34,570 $ 58,781
The Phoenix Loan (as defined below) - 11,133
Convertible Subordinated Debt (as defined below) - 4,452
Notes payable to various equipment lenders
10,689 27,638
Other notes payable
514 202
------------------------------------
45,773 102,206
Less current portion (1,931) (5,503)
------------------------------------
$ 43,842 $ 96,703
====================================
</TABLE>
44
<PAGE>
PART II
================================================================================
In July 1997, the Company terminated its existing revolving credit facility and
entered into a $20 million, unsecured revolving credit facility (the "Revolver")
with a bank, the proceeds of which are to be used for general corporate
purposes. The Revolver matures on July 28, 1999. Borrowings under the Revolver
bear interest at variable rates based, at the Company's option, on the bank's
base rate plus 1/2% or the London Interbank Offered Rate ("LIBOR") plus 1 1/2%.
Amounts available under the Revolver are subject to a borrowing base which
includes a percentage of the Company's eligible accounts receivable. Under the
borrowing base, at September 30, 1997, there was approximately $18 million
available under the Revolver and the Company had no outstanding balance.
In connection with the termination of its existing revolving credit facility,
the Company recorded an extraordinary loss on early extinguishment of debt of
approximately $230,000 (net of income tax benefit of $143,000), which
represented the unamortized loan origination fees.
From 1994 to 1996, the Company entered into mortgage loans with real estate
investment trusts ("REITs") for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas and Tucson Heart Hospitals
(collectively the "REIT Loans"). The interest rate on the REIT Loans is at 3
1/2% to 4 1/4% above a rate index tied to U.S. Treasury Notes, that is
determined on the completion date of the hospital, and subsequently increases by
22 to 27 basis points per year. As of September 30, 1997, the interest rates on
the REIT Loans ranged from 9.50% to 11.54%. The principal and interest is
payable monthly over a seven year term through 2005 using extended period
amortization schedules and include balloon payments at the end of each
respective term. Each are subject to extension for an additional seven years at
the option of the Company. Borrowings under the REIT Loans are secured by a
pledge of the Company's interest in the respective partnerships or limited
liability companies, the land on which the hospital stands, the hospital
building and fixtures and certain other hospital assets.
In August 1997, the Company entered into a mortgage loan with a bank for the
purpose of financing a portion of the land acquisition and construction costs of
the Arizona Heart Hospital (the "Phoenix Loan"). Borrowings of up to $28 million
are available and the term is for three years, subject to extension for an
additional year at the option of the Company. Principal amortization begins in
September 1999 using an extended amortization schedule and becomes due and
payable in September 2000, unless the term is extended by the Company. Interest
is payable monthly based on LIBOR plus 3 1/4% decreasing to LIBOR plus 2 3/4%
upon the attainment of certain financial ratios. As of September 30, 1997, the
interest rate on the Phoenix Loan was 8.50%. Borrowings under the Phoenix Loan
are secured by a pledge of the Company's interest in the Partnership, the land
on which the hospital stands, the hospital building and fixtures and certain
other hospital assets.
The Company has acquired substantially all of the medical and other equipment
for the McAllen, Arkansas and Tucson Heart Hospitals under installment notes
payable to equipment lenders secured by the related equipment. 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 ranging from 8 1/2% to
10 3/4%.
In October 1996, the Company entered into a 40-year contract to manage Heart
Clinic, P.A. ("Heart Clinic") a multi-physician cardiologist group located in
McAllen, Texas. The Company issued a convertible subordinated promissory note in
the amount of $6.4 million in connection with the acquisition. 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 the option of the noteholder) 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. The note is not a profit sharing
agreement and if the production levels are met, the note will be issued
regardless of the physicians' employment status with the practice. Accordingly,
additional amounts provided under the note, if any, will be considered an
addition to the acquisition cost of the management contract, will be recorded
as an intangible asset and will be amortized over the remaining term of the
management contract.
Covenants related to long-term debt prohibit the payment of dividends and
require the maintenance of specific financial ratios and amounts. The Company
was in compliance with these covenants at September 30, 1997.
45
<PAGE>
PART II
================================================================================
In July 1997, the Company obtained a financing commitment from a REIT 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 monthly over a seven year term using an extended period amortization
schedule.
Future maturities of long-term debt as of September 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1998 $ 5,503
1999 10,162
2000 17,272
2001 6,117
2002 4,540
2003 and thereafter 58,612
-------------------
$ 102,206
===================
</TABLE>
7. Commitments and Contingencies
The Company currently leases several Mobile Cath Labs, Fixed Site Facilities,
office space, computer software, and certain vehicles under noncancelable
capital and operating leases expiring through fiscal year 2002. Some of these
leases contain provisions for annual rental adjustments based on increases in
the consumer price index, renewal options and options to purchase during the
lease terms. Amortization of the capitalized amounts are included in
depreciation and amortization expense in the accompanying consolidated financial
statements through the retirement date of the leases.
Total future minimum payments under leases with initial terms of one year or
more as of September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Capital Operating
Fiscal Year
1998 $ 838 $ 764
1999 838 676
2000 838 529
2001 785 442
2002 32 369
2003 and thereafter - 50
------------------- ---------------------
Total future minimum lease payments 3,331 $ 2,830
=====================
Less: amounts representing interest (572)
-------------------
Present value of net minimum lease payments 2,759
Less: current portion (599)
-------------------
$ 2,160
===================
</TABLE>
Rent expense under all operating leases was $1.2 million, $1.3 million and $1.6
million for the years ended September 30, 1995, 1996 and 1997, respectively.
The Company has entered into agreements to provide networks of hospitals with
Mobile Cath Labs and related catheterization services through 2001. In addition,
the Company leases several Mobile Cath Labs to hospitals under lease agreements
of various lengths. These are accounted for as operating leases, and the rental
income is included in revenue in the consolidated statements of income when
earned.
46
<PAGE>
PART II
================================================================================
Total future minimum revenue to be earned under these agreements as of September
30, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
1998 $ 6,126
1999 1,994
2000 774
2001 7
-------------------
$ 8,901
===================
</TABLE>
At September 30, 1997, the Company was contingently liable for outstanding
letters of credit of $2 million relating to the REIT Loans.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect, if any, on
the Company's consolidated financial position or results of operations.
8. Income Taxes
The components of the provision for income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
Current tax expense:
Federal $ 1,732 $ 2,296 $ 2,466
State 350 674 742
Deferred tax expense:
Federal 443 253 825
State 40 74 282
Pro forma tax provision of pooled entity 212 - -
------------------------------------------------------
$ 2,777 $ 3,297 $ 4,315
======================================================
<CAPTION>
<S> <C>
The components of net deferred taxes were as follows (in thousands):
September 30,
------------------------------------
1996 1997
------------------------------------
Deferred tax liabilities:
Excess of book over tax bases of property and
equipment $ (1,700) $ (4,423)
Tax over book amortization (697) (64)
Other (468) (167)
Deferred tax assets:
Nondeductible reserves 120 813
Other 120 110
------------------------------------
Net deferred tax liability $ (2,625) $ (3,731)
====================================
</TABLE>
47
<PAGE>
PART II
================================================================================
The differences between the U.S. federal statutory tax rate and the Company's
effective rate were as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 4.1 6.0 6.1
Tax exempt interest income - (3.3) (4.9)
Other 1.4 2.1 3.4
------------------------------------------------------
Effective income tax rate 39.5% 38.8% 38.6%
======================================================
</TABLE>
9. Shareholders' Equity and Stock Options
In 1995, the Company completed an initial public offering of 2.3 million shares
of its common stock netting proceeds of approximately $28.9 million. A portion
of the proceeds was used to repay $4.2 million of subordinated debt and $9.6
million of bank financing. The remainder of the proceeds were used to fund the
development of new Heart Hospitals and Fixed-Site Facilities and ongoing capital
expenditures.
Upon the retirement of subordinated debt, the Company incurred an extraordinary
loss on the early extinguishment of debt of approximately $228,000 (net of the
income tax benefit of $140,000), which represented the unamortized portion of
the original issue debt discount. Assuming the Company had issued the necessary
shares of common stock and used the proceeds to retire the debt on October 1,
1994, the pro forma net income per share would not have differed from the
reported amount.
In April 1996, the Company completed a public offering of 2.3 million shares of
its common stock netting proceeds of approximately $62.5 million. 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 were used to fund (i) a portion of the construction and start-up
costs of Heart Hospitals and Fixed-Site Facilities, (ii) potential future
acquisitions, (iii) working capital and (iv) general corporate purposes.
Assuming the Company had issued the necessary shares of common stock and used
the net proceeds to retire the Revolver and the capitalized leases on October 1,
1995, the pro forma net income per share for the year ended September 30, 1996,
would not have differed from the reported amount.
On October 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan under which common stockholders have the right to purchase Series A
Participating Preferred Stock in the event of an accumulation of or tender offer
for at least 15% of the Company's common stock. The rights will expire on
October 15, 2006, unless redeemed or exchanged earlier by the Company. The
rights will be represented by existing common stock certificates until they
become exercisable and no rights are exercisable under the plan.
In August 1992, the Company adopted an Incentive Stock Option Plan (the "ISO
Plan") for key employees. The Company has reserved 296,587 shares of common
stock for issuance under the ISO Plan.
In October 1994, the Board of Directors adopted the 1994 Omnibus Stock Plan (the
"Omnibus Plan"). The Omnibus Plan is intended to encourage high levels of
performance from key employees and enable the Company to retain their services
on a basis competitive with industry practices. Through September 30, 1997,
awards under the Omnibus Plan consisted of options to purchase common stock. The
Company has reserved 1,300,000 shares of common stock for issuance under the
Omnibus Plan.
48
<PAGE>
PART II
================================================================================
In October 1994, the Board of Directors adopted the Outside Directors' Stock
Option Plan (the "Directors' Plan"). Under the Directors' Plan, each outside
director joining the Board will automatically be granted a non-qualified option
to purchase 2,000 shares of common stock at fair market value on the date of
grant. On each anniversary of an outside director's election to the Board, an
additional option to purchase 2,000 shares of common stock will be granted at
the then fair market value. The Company has reserved 50,000 shares of common
stock for issuance under the Directors' Plan.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued. SFAS 123
encourages a fair value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording of
additional compensation expense in an entity's financial statements. SFAS 123
also allows an entity to continue to account for stock-based employee
compensation using the intrinsic value for equity instruments under APB Opinion
No. 25. The company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation expense for the various stock option plans been
determined consistent with the provisions of SFAS 123, the Company's net income
and net income per share would have been the pro forma amounts indicated below
(in thousands, except per share data):
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30,
--------------------------- --------------------------
1996 1997
--------------------------- --------------------------
Net Income:
As Reported $ 5,202 $ 6,724
Pro Forma $ 5,109 $ 6,252
Net Income Per Weighted Average Share
As Reported $ .53 $ .60
Pro Forma $ .52 $ .56
Net Income Per Share Assuming Dilution
As Reported $ .51 $ .58
Pro Forma $ .50 $ .56
</TABLE>
Because SFAS 123 is applicable only to options granted after September 30,
1995, only those subsequent years are presented.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following range of assumptions used
for the option grants which occurred during 1996 and 1997:
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30,
--------------------------- --------------------------
1996 1997
--------------------------- --------------------------
Volatility 23.0% - 24.2% 23.0% - 24.2%
Interest rate 6.0% - 6.9% 6.0% - 7.1%
Expected life (years) 6 - 10 6 - 10
</TABLE>
Stock-based compensation costs on a pro forma basis would have reduced pretax
income by $153,000 ($93,000 after tax) and $768,000 ($472,000 after tax) in 1996
and 1997, respectively. Because the SFAS 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
disclosures may not be representative of that to be expected in future years.
49
<PAGE>
PART II
================================================================================
Option plan activity for the years ended September 30, 1995, 1996 and 1997 is
set forth below:
<TABLE>
<CAPTION>
<S> <C>
Number of Shares Weighted
Average Option Price Per Share
Price
--------------------------------------------------------
--------------------------------------------------------
Outstanding options, September 30, 1994 300,118 $ 3.91 $ 3.54 - 7.51
Granted 310,000 12.31 12.00 - 14.00
Exercised (52,020) 3.63 3.54 - 7.51
Canceled -
-------------------
Outstanding options, September 30, 1995 558,098 $ 8.60 $ 3.54 - 14.00
Granted 475,448 17.32 12.00 - 34.75
Exercised (40,721) 3.88 3.54 - 7.51
Canceled (92,500) 19.89 13.50 - 34.75
-------------------
Outstanding options, September 30, 1996 900,325 $12.26 $ 3.54 - 24.00
Granted 270,449 14.50 13.13 - 19.50
Exercised (47,277) 3.54 3.54
Canceled (205,870) 16.57 3.54 - 18.25
-------------------
Outstanding options, September 30, 1997 917,627 $12.40 $3.54 - 24.00
===================
</TABLE>
Options to purchase 26,481, 105,455 and 180,294 shares of common stock were
exercisable as of September 30, 1995, 1996 and 1997, respectively. Total common
shares reserved for future issuance under these plans were 844,567, 1,053,846
and 1,506,569 as of September 30, 1995, 1996 and 1997, respectively. The
weighted average fair value for options granted in 1996 and 1997 with an
exercise price equal to the stock price at the grant date was $7.76 and $6.49,
respectively. The weighted average fair value for options granted in 1996 and
1997 with an exercise price greater than the stock price at the grant date was
$3.32 and $6.75, respectively.
Options outstanding at September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Options Outstanding Options Exercisable
-------------------------------------- ------------------------------------------
Remaining Weighted Average Weighted Average
Contractual Life Number Exercise Price Number Exercise Price
- --------------------- ---------------- --------------------- --------------- --------------------------
5 Years 121,140 $ 3.54 81,713 $ 3.54
6 Years 23,539 7.51 15,300 7.51
8 Years 286,500 12.34 29,286 13.23
9 Years 254,999 15.35 33,318 15.69
10 Years 231,499 14.36 20,677 13.13
---------------- ---------------
917,627 180,294
================ ===============
</TABLE>
10. Supplemental Cash Flow Information
The Company gave non-cash consideration totaling approximately $7.0 million,
$1.9 million and $7.3 million for the years ended September 30, 1995, 1996 and
1997, respectively, for acquisitions of net assets and management contracts.
50
<PAGE>
PART II
================================================================================
Interest paid, net of amounts capitalized, during the years ended September 30,
1995, 1996 and 1997 was $1.7 million, $2.0 million and $4.9 million,
respectively. Total interest capitalized during the years ended September 30,
1995, 1996 and 1997 was $0.6 million, $1.3 million and $2.3 million,
respectively.
Income taxes paid, net of refunds, during the years ended September 30, 1995,
1996 and 1997 were $2.4 million, $3.4 million and $1.8 million, respectively.
The Company entered into capital lease obligations during the years ended
September 30, 1995, 1996 and 1997 totaling $0.2 million, $2.4 million and $0.7
million, respectively.
11. Malpractice Insurance Coverage
The Company is subject to claims arising in the course of providing services.
The Company maintains malpractice insurance coverage on a "claims made" basis,
with coverage being contingent on a policy being in effect when a claim is made,
regardless of when the events which gave rise to the claim occurred.
12. Employee Benefit Plan
In January 1994, the Company adopted a defined contribution retirement savings
plan (the "401(k) Plan") which covers all employees who meet minimum service
requirements. The 401(k) Plan allows eligible employees to contribute from 1% to
15% of their annual compensation on a pre-tax basis. The Company, at its
discretion, may make an annual contribution of up to 25% of an employee's
pre-tax contribution, up to a maximum of 6% of compensation. The Company's
contributions to the 401(k) Plan for the years ended September 30, 1995, 1996
and 1997 were approximately $38,000, $54,000 and $143,000, respectively.
13. Disclosures About Fair Values of Financial Instruments
The Company considers the carrying amounts of significant classes of financial
instruments on the consolidated balance sheets, including cash, short-term
investments, loans to affiliates, long-term debt, obligations under capital
leases and other long-term obligations to be reasonable estimates of fair value.
Fair value of the Company's debt and obligations under capital leases was
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of arrangements.
51
<PAGE>
PART II
================================================================================
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial results were as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
<S> <C>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------
Fiscal Year 1996:
Net revenue $ 11,209 $ 17,284 $ 18,376 $ 19,322
Operating expenses 8,846 14,631 16,108 16,709
----------------------------------------------------------------------
Income from operations 2,363 2,653 2,268 2,613
Net income 1,226 1,302 1,172 1,502
Net income per weighted
average share .14 .15 .11 .13
Net income per share assuming
dilution .14 .14 .10 .13
Fiscal Year 1997:
Net revenue 22,854 26,709 29,915 31,432
Operating expenses 19,333 22,805 25,880 27,066
----------------------------------------------------------------------
Income from operations 3,521 3,904 4,035 4,366
Income before extraordinary loss
1,754 2,097 1,546 1,557
Extraordinary loss - - - (230)
----------------------------------------------------------------------
Net income $ 1,754 $ 2,097 $ 1,546 $ 1,327
======================================================================
Income per weighted average
share before extraordinary
item .16 .19 .14 .13
======================================================================
Income per share before
extraordinary item assuming
dilution .15 .18 .13 .14
======================================================================
Net income per weighted average
share .16 .19 .14 .12
======================================================================
Net income per share assuming
dilution .15 .18 .13 .12
======================================================================
</TABLE>
52
<PAGE>
PART II
================================================================================
15. Segment Information
The Company provides cardiology and cardiovascular services through the
development, operation and management of heart hospitals (the "Hospital
Division"), the development, operation and management of Fixed-Site Facilities
and Mobile Cath Labs (the "Diagnostics Division") and provides physician
practice management services (the "Practice Management Division"). Financial
information concerning the Company's operations by business segment as of and
for the periods indicated are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
Net revenue:
Diagnostics Division $ 30,308 $ 34,085 $ 36,612
Practice Management Division 9,798 14,706 18,848
Hospital Division - 17,400 54,966
Corporate and other - 484
----------------- ----------------------------------
-
Consolidated totals $ 40,106 $ 66,191 $ 110,910
=========== ============== ===============
Income from operations:
Diagnostics Division $ 10,611 $ 12,972 $ 12,978
Practice Management Division 1,003 1,499 2,222
Hospital Division - (616) 5,267
Corporate and other (3,165) (3,958) (4,641)
-------------- ---------------- ----------------
Consolidated totals $ 8,449 $ 9,897 $ 15,826
============ =============== ================
Depreciation and amortization:
Diagnostics Division $ 3,405 $ 3,474 $ 4,452
Practice Management Division 184 251 466
Hospital Division - 2,838 7,745
Corporate and other 44 86 192
------------ ------------ ------------
Consolidated totals $ 3,633 $ 6,649 $ 12,855
============ =============== ================
Capital expenditures:
Diagnostics Division $ 3,020 $ $ 3,334
6,611
Practice Management Division - 72 343
Hospital Division 13,043 37,978 70,940
Corporate and other 170 317 835
-------------- -------------- --------------
Consolidated totals $ 16,233 $ 44,978 $ 75,452
=========== ============== ==============
Aggregate identifiable assets:
Diagnostics Division $ 31,378 $ 37,641 $ 48,259
Practice Management Division 10,289 15,089 21,484
Hospital Division 21,947 68,740 158,722
Corporate and other 14,758 60,211 30,543
------------ ------------ ------------
Consolidated totals $ 78,372 $ 181,681 $ 259,008
=========== ============= =============
</TABLE>
Substantially all of the Company's revenue in its Diagnostics and Hospital
Divisions is derived directly or indirectly from patient services, and
substantially all of the Company's revenue in its Practice Management Division
is derived from management fees. The amounts presented for "Corporate and other"
include, general overhead expenses, certain cash and cash equivalents,
short-term investments, prepaid expenses, other assets and other operations of
the business not subject to segment reporting.
53
<PAGE>
PART II
================================================================================
16. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
<S> <C>
Year Ended September 30
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
Numerator:
Income before extraordinary item (A) $ 4,251 $ 5,202 $ 6,954
Interest Expense - Convertible
Subordinated Debt - - 112
------------------------------------------------------
Adjusted income before
extraordinary item (B) $ 4,251 $ 5,202 $ 7,066
======================================================
Net income (C) $ 4,023 $ 5,202 $ 6,724
Interest Expense - Convertible
Subordinated Debt - - 112
------------------------------------------------------
Adjusted net income (D) $ 4,023 $ 5,202 $ 6,836
======================================================
Denominator:
Weighted Average Common Shares
Outstanding (E) 7,760 9,875 11,149
Assumed conversion of Redeemable
Preferred Stock into Common Shares
at beginning of year 410 - -
Dilutive effect of stock options 211 318 219
Assumed conversion of Convertible
Subordinated Debt into Common Shares
- - 318
------------------------------------------------------
Adjusted weighted average shares and
assumed conversions (F) 8,381 10,193 11,686
======================================================
Basic earnings per share
Income before extraordinary (A)/(E) $ 0.55 $ 0.53 $ 0.62
item
======================================================
Net income (C)/(E) $ 0.52 $ 0.53 $ 0.60
======================================================
Diluted earnings per share
Income before extraordinary (B)/(F) $ 0.51 $ 0.51 $ 0.60
item
======================================================
Net income (D)/(F) $ 0.48 $ 0.51 $ 0.58
======================================================
</TABLE>
Item 9 - Changes in and Disagreements with Accountants or Accounting and
Financial Disclosure
None.
54
<PAGE>
PART III
================================================================================
Item 10 - Directors and Executive Officers of the Registrant
The Board of Directors consists of six directors. Directors are elected
annually and serve until the next annual meeting of shareholders and their
successors are elected and qualified. The following table sets forth certain
information regarding the executive officers and directors of the Company.
<TABLE>
<CAPTION>
<S> <C>
Name Age Position
---- --- --------
Stephen R. Puckett 45 Chairman of the Board of Directors,
President
and Chief Executive Officer
David Crane 41 Executive Vice President and Chief
Operating Officer
Charles W. (Todd) Johnson 40 Senior Vice President - Development and
Managed Care
Richard J. Post 42 Chief Financial Officer, Secretary and
Treasurer
Thomas K. Hearn III 36 President - Diagnostics Division
R. William Moore, Jr. 47 President - Hospital Division
A. Kenneth Petronis 38 President - Practice Management Division
Patrick J. Welsh 54 Director
Andrew M. Paul 41 Director
W. Jack Duncan 55 Director
John B. McKinnon 62 Director
</TABLE>
Stephen R. Puckett was a founder of the Company in 1988 and has served
as Chairman of the Board of Directors, President and Chief Executive Officer of
the Company since that time. From 1984 to 1989, Mr. Puckett served as Executive
Vice President and Chief Operating Officer of Charlotte Mecklenburg Hospital
Authority (the "Authority"), a 1,677-bed multi-hospital system, and from 1981 to
1983, he served as Senior Vice President of the Authority. Carolinas Medical
Center, an 853-bed hospital and the largest facility in the Authority's system,
operates one of the largest heart programs in the Southeast. While he was
associated with the Authority, Mr. Puckett was active in managing many of the
additions to the Carolinas Medical Center, including an 80,000 square foot heart
institute with four surgical suites and several cardiac diagnostic and
therapeutic laboratories. From 1976 to 1981, Mr. Puckett worked for the
University of Alabama hospital and served in a variety of management positions
with increasing responsibilities for hospital operations. Mr. Puckett serves as
a director of Cardiovascular Diagnostics, Inc. Mr. Puckett received a B.A. and
an M.S. in Health Management from the University of Alabama.
David Crane has served as a director and Chief Operating Officer of the
Company since 1989 and Executive Vice President since 1997. From 1985 to 1989,
Mr. Crane was employed by MediVision, Inc., an owner/manager of ophthalmic
outpatient surgery centers and private ophthalmic surgical practices, and he
served as Chief Operating Officer of MediVision from 1987 to 1989. While he was
associated with MediVision, Mr. Crane managed the construction of several
ophthalmic outpatient surgical centers. From 1982 to 1985, he was a business and
health care consultant with Bain & Company, a consulting firm. Mr. Crane
received a B.A. from Yale University and an M.B.A. from Harvard Business School.
55
<PAGE>
PART III
================================================================================
Charles W. (Todd) Johnson has served as a Vice President of the Company
since April 1995 when the Company acquired all of the outstanding shares of
HealthTech Corporation and as Senior Vice President - Development and Managed
Care since 1997. Mr. Johnson was the founder and President of HealthTech
Corporation, a company whose principal business was the ownership and operation
of mobile cardiac catheterization laboratories. Prior to founding HealthTech
Corporation in July 1991, Mr. Johnson was a partner in Paragon Group, a national
real estate development and investment company. Mr. Johnson received a B.A. from
the University of North Carolina and an M.B.A. from Wake Forest University.
Richard J. Post joined MedCath in September 1996 as Chief Financial
Officer, Secretary and Treasurer. From 1986 to 1996, Mr. Post was employed as an
investment banker, assisting clients in the execution of a wide variety of
public and private debt and equity financings and merger and acquisition
transactions. He served as a Senior Vice President, Corporate Finance with Price
Waterhouse LLP from 1994 to 1996. From 1992 to 1994, he was a Senior Manager in
the Corporate Finance Department of Ernst & Young LLP and from 1988 to 1992, he
was a Vice President in the Investment Banking Department of Bear, Stearns & Co.
Inc. From 1986 to 1988, he was an Associate in the Corporate Finance Group at
The First Boston Corporation. Mr. Post served as a Military Intelligence Officer
in the United States Army from 1977 to 1986. He received a B.A. in English and
Philosophy from the University of Notre Dame and an M.B.A. from Harvard Business
School.
Thomas K. Hearn III, has served as President - Diagnostics Division
since joining the Company in November 1995. From August 1993 until he joined the
Company, Mr. Hearn served as President of Decision Support Systems, Inc., a
health care software and consulting firm that he co-founded. Prior to
co-founding that company, he was employed from 1987 to 1993 by the Charlotte
Mecklenburg Hospital Authority where he served as Vice President of
Administration and Administrator of the Authority's Carolinas Heart Institute,
one of the busiest centers for the treatment of cardiovascular disease in the
Southeast. From 1985 to 1987 Mr. Hearn developed managed care products for VHA.
Mr. Hearn received a B.A. from the College of William and Mary, and the M.P.H.
and M.B.A. degrees from the University of Alabama at Birmingham.
R. William Moore, Jr. has served as President - Hospital Division of
the Company since November 1995. He joined the Company in April 1994 and from
that date until he was appointed to his current position, he served as President
of the Company's first specialty heart hospital, the McAllen Heart Hospital in
McAllen, Texas. From 1989 until he joined the Company, Mr. Moore was
Administrator of University Hospital, a 130-bed hospital in the Charlotte
Mecklenburg Hospital Authority multi-hospital system. Prior thereto, he held
other top management positions for eight years in the Charlotte Mecklenburg
Hospital Authority system and with Memorial Mission Hospital in Asheville, North
Carolina. Mr. Moore received a B.A. from Ohio Northern University and an M.B.A.
from Western Carolina University.
A. Kenneth Petronis, joined MedCath in August 1997 as President -
Practice Management Division. Prior to joining MedCath, Mr. Petronis was a Vice
President of PHP, Inc., a subsidiary of United HealthCare, where he was
responsible for all physician provider network negotiations and interface and
was instrumental in contracting with over 2,000 physicians. From 1990 to 1993 he
was Chief Executive Officer of a large, cardiology-focused, multi-specialty
physician group practice. From 1983 to 1990, Mr. Petronis was employed by Ernst
& Young LLP where he served in a number of capacities, including a Senior
Manager in the Healthcare Consulting Group.
Patrick J. Welsh, a director of the Company since 1991, has been a
general partner of the sole general partner of WCAS since its formation. Mr.
Welsh has been a general partner of the sole general partner of associated
limited partnerships since 1979. Prior to 1979, Mr. Welsh was President and a
director of Citicorp Venture Capital, Ltd., an affiliate of Citicorp engaged in
venture capital investing. Mr. Welsh serves as a director of Walsh
International, Inc., Pharmaceutical Marketing Services Inc. and several
privately-held companies.
56
<PAGE>
PART III
================================================================================
Andrew M. Paul has been a director of the Company since 1991. He joined
Welsh, Carson, Anderson & Stowe in 1984, where he currently serves as a general
partner of the sole general partner of WCAS. From 1983 to 1984, he was an
associate in Hambrecht & Quist's venture capital group. From 1978 to 1981, he
was a systems engineer and then a marketing representative for IBM. Mr. Paul
received a B.A. from Cornell University and an M.B.A. from Harvard Business
School. Mr. Paul serves as a director of Lincare, Inc., Centennial Healthcare,
Inc., Housecall Medical Resources, Inc. and several privately-held companies.
W. Jack Duncan has served as a director of the Company since September
1994. Since 1987, he has been a Professor and University Scholar in Management
in the Graduate School of Management and Professor of Health Care Organization
and Policy and a Senior Scholar in the Lister Hill Center for Health Policy in
the School of Public Health at the University of Alabama at Birmingham. He is
the author of 14 books on management and over 100 articles and published papers
in management journals. Dr. Duncan received a B.S. in Economics from Howard
College and an M.B.A. and a Ph.D. from Louisiana State University.
John B. McKinnon has been a director of the Company since February
1996. From 1989 until his retirement in 1995, he served as the Dean of the
Babcock Graduate School of Management at Wake Forest University. From 1986 to
1988 he served as President of Sara Lee Corporation. Mr. McKinnon also serves as
a director of Premark International, Morrison's Health Care, Inc., Ruby Tuesday,
Inc., Integon Corporation and two privately-held companies. He received an A.B.
from Duke University and an M.B.A. from Harvard Business School.
Item 11 - Executive Compensation
The table on the following page sets forth certain information for each
of the last three fiscal years concerning the compensation of the Company's
President and Chief Executive Officer and the Company's other four most highly
compensated executive officers who were serving as executive officers at
September 30, 1997 (the "Named Executive Officers").
57
<PAGE>
PART III
================================================================================
Summary Compensation Table
<TABLE>
<CAPTION>
<S> <C>
Long-Term
Compensation
Awards
Number of
Securities All Other
Underlying Compensation
Annual Compensation Options (#)(1) ($)(2)
------------------- -------------- ------
Name and Principal Position Year Salary ($) Bonus ($)
- --------------------------- ---- ---------- ---------
Stephen R. Puckett
President and Chief Executive 1997 $ 259,980 $127,500 52,143 $ 2,250
Officer ...................... 1996 192,344 67,247 77,671 2,461
1995 183,185 116,000 100,000 2,481
David Crane 1997 $ 204,972 $100,000 30,000 $ 2,250
Executive Vice President and 1996 160,287 56,039 51,276 2,439
Chief Operating Officer...... 1995 152,654 84,000 60,000 2,435
Charles W. (Todd) Johnson
Senior Vice President - 1997 $ 170,904 $ 90,000 8,306 $ 2,370
Development and 1996 155,925 54,511 29,001 3,086
Managed Care................. 1995(3) 65,058 47,000 20,000 400
Richard J. Post
Chief Financial Officer, 1997 $ 147,372 $ 72,500 50,000 $ 184
Secretary and 1996 -------- -------- -------- --------
Treasurer..................... 1995 -------- -------- -------- --------
R. William Moore, Jr.
President-Hospital Division... 1997 $148,800 $ 50,000 -------- $ 22,893
1996 141,639 14,000 7,500 2,125
1995 115,000 52,500 -------- 1,688
</TABLE>
- --------------------
(1) The Company's executive compensation program consists of three
principal components: base salary, cash bonuses and long-term incentive
compensation in the form of stock options. Stock options granted in a
particular fiscal year may in fact be based upon each Named Executive
Officer's contributions to the Company's performance in the prior
fiscal year. The number of options granted are based upon (i)
provisions of each Named Executive Officer's respective employment
agreement or (ii) an evaluation by the Chief Executive Officer or the
Compensation Committee. For example, options to purchase 89,318;
53,591; 44,659; 15,000; and 10,000 shares were granted to Messrs.
Puckett, Crane, Johnson, Post and Moore, respectively, in October 1997
based upon an evaluation of their respective contributions to the
Company's performance in the prior fiscal year. See the table on the
following page providing information about stock options granted during
the fiscal year ended September 30, 1997.
58
<PAGE>
PART III
================================================================================
(2) For fiscal year 1997, consists of (i) matching contributions to the
Company's 401(k) Plan and (ii) life insurance premiums paid in the
amount of $1,110 on behalf of Mr. Johnson and (iii) a moving allowance
in the amount of $21,093 paid to Mr. Moore. For fiscal year 1996,
consists of matching contributions to the Company's 401(k) Plan and
(ii) life insurance premiums paid in the amount of $1,000 on behalf of
Mr. Johnson. For fiscal year 1995, consists of (i) matching
contributions to the Company's 401(k) Plan and (ii) life insurance
premiums in the amounts of $60, $41 and $24 paid on behalf of Messrs.
Puckett, Crane and Johnson, respectively.
(3) For fiscal year 1995, represents compensation earned for the period
from April 24, to September 30, 1995, the date Mr. Johnson became an
executive officer of the Company.
Stock Options Granted During the Fiscal Year Ended September 30, 1997
The following table provides certain information concerning grants of
options to purchase shares of Common Stock made during the fiscal year ended
September 30, 1997 to the Named Executive Officers. These option grants were
made under the Company's Omnibus Stock Plan, and represented, in each instance,
a replacement grant upon cancellation of previously-granted stock options. In
connection with these replacement grants, the exercise prices of the stock
options previously awarded to these executive officers were adjusted to reflect
the replacement grant-date market price. The vesting provisions of these
replacement stock options did not, however, provide the Named Executive Officers
with any credit for the periods of time they held the stock options that were
canceled in connection with the replacement grants.
<TABLE>
<CAPTION>
<S> <C>
Option Grants in Last Fiscal Year
IndividualGrants
% of Total
Number of Options
Securities Granted to Potential Realizable Value
Underlying Employees Exercise at Assumed Annual Rates
Options in Fiscal Price Expiration of Stock Price Appreciation
Granted (#) Year (1) ($/sh) Date for Option Term (2)
----------- ------------ ---------- ----- -------------------------------
Name 5% ($) 10% ($)
---- ------ -------
Stephen R. Puckett 4,553(3) 1.7% $14.44 4/28/02 $ 10,523 $ 30,496
47,590(4) 17.9 13.13 4/28/07 392,819 995,481
David Crane 30,000(5) 11.3% $13.13 4/28/07 $ 247,627 $ 627,536
Charles W. (Todd) Johnson 8,306(6) 3.1% $13.13 4/28/07 $ 68,560 $ 173,744
Richard J. Post 50,000(7) 18.8% $13.13 4/28/07 $ 412,712 $ 1,045,893
---- ----
R. William Moore, Jr. ------ ---- ---- ----
</TABLE>
- --------------------
59
<PAGE>
PART III
================================================================================
(1) In fiscal 1997, options to purchase an aggregate of 266,449 shares of
Common Stock were granted to all employees.
(2) Represents potential net gain of the exercise price before income taxes
associated with the exercise of the options. The 5% and 10% assumed
annual rates of compounded stock price appreciation are mandated by the
Securities and Exchange Commission (the "Commission") and do not
represent the Company's estimates or projections of the future Common
Stock price. For the options expiring on April 28, 2002 assumes a stock
price per share of $16.75 for the 5% rate and of $21.14 for the 10%
rate. For the options expiring on April 28, 2007, assumes a stock price
per share of $21.38 for the 5% rate and of $34.04 for the 10% rate. The
Common Stock price on April 28, 1997 (the date of grant for all options
granted to the Named Executive Officers during the year) was $13.13.
(3) These shares of Common Stock are issuable upon exercise of incentive
stock options that vest and become exercisable as follows: 1,294 and
3,259 shares in equal monthly installments over January, 2000 through
December, 2000, and January, 2001 through March, 2001, respectively.
(4) These shares of Common Stock are issuable upon exercise of
non-qualified stock options that vest and become exercisable as
follows: 35,848 and 11,742 shares in equal monthly installments over
April, 1997 through December, 1999, and January, 2000 through December,
2000, respectively.
(5) These shares of Common Stock are issuable upon exercise of incentive
and non-qualified stock options that vest and become exercisable as
follows: 2,923 and 1,875 incentive stock options in equal monthly
installments from January, 2000 through December, 2000, and January,
2001 through March, 2001, respectively; and 20,625 and 4,577
non-qualified stock options in equal monthly installments from April,
1997 through December, 1999, and January, 2000 through December, 2000,
respectively.
(6) These shares of Common Stock are issuable upon exercise of incentive
and non-qualified stock options that vest and become exercisable as
follows: 1,558, 3,046 and 520 incentive stock options in equal monthly
installments from April, 1997 through December, 1997, January, 1998
through December, 1999 and January, 2001 through March, 2001,
respectively; and 1,106 and 2,076 non-qualified stock options in equal
monthly installments from January, 1998 through December, 1999, and
January, 2000 through December, 2000, respectively.
(7) These shares of Common Stock are issuable upon exercise of incentive
and non-qualified stock options that vest and become exercisable as
follows: 7,619, 22,857 and 3,125 incentive stock options in equal
monthly installments from April, 1997 through December, 1997, January,
1998 through December, 2000 and January, 2001 through March, 2001,
respectively; and 1,756 and 14,643 non-qualified stock options in equal
monthly installments from April, 1997 through December, 1997, and
January, 1998 through December, 2000, respectively.
60
<PAGE>
PART III
================================================================================
Option Exercises and Year-end Values for Fiscal Year Ended September 30, 1997
The following table provides certain information concerning shares acquired and
value realized on exercise of options, the number of shares of Common Stock
underlying unexercised options held by each of the Named Executive Officers and
the value of such officers' unexercised options at September 30, 1997.
<TABLE>
<CAPTION>
<S> <C>
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at
Year-End (#) Fiscal Year-End ($)(1)
Shares
Acquired
on Value
Name Exercise (#) Realized($)(2) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------------- ----------- ------------- ----------- -------------
Stephen R. Puckett ------- ------- 30,095 147,596 $ 88,580 $ 557,489
David Crane ------- ------- 89,995 128,259 1,089,034 752,953
Charles W. (Todd) ------- ------- 5,746 43,255 4,022 128,164
Johnson
Richard J. Post ------- ------- 6,249 43,751 24,215 169,535
R. William Moore, Jr. ------- ------- 11,925 23,229 111,688 80,224
- --------------------
</TABLE>
(1) The value of the unexercised in-the-money options is based on the
difference between the closing sales price of the Common Stock on
September 30, 1997 of $17.00 per share and the exercise price of the
options.
(2) The value realized upon exercise of stock options is based on the
difference between the fair market value of the shares of Common Stock
underlying the options and the exercise price of the options at the
date of exercise.
Employment Agreements
Pursuant to employment agreements dated October 1, 1997, Messrs.
Puckett, Crane and Johnson are entitled to base annual salaries of $250,000,
$200,000, and $180,000, respectively (the "Employment Agreements"). Under the
Employment Agreements, Messrs. Puckett, Crane and Johnson are also entitled to
receive annual cash bonuses if the Company's actual earnings per share equals or
exceeds 80% of the target earnings per share for the year established in advance
by the Board of Directors. The amount of the cash bonus is, in each case, an
amount equal to the comparative percentage of the Company's actual earnings per
share to the target earnings per share (subject to a cap of 120%) times an
amount equal to 50% of the executive officer's base salary.
61
<PAGE>
PART III
================================================================================
Messrs. Puckett, Crane and Johnson are also entitled to awards of
incentive stock options annually with the number of shares issuable upon
exercise thereof to be determined in accordance with a formula designed to
increase the number of shares issuable when the actual rate of growth in
earnings per share exceeds the percentage growth target established in advance
by the Board of Directors. Any incentive stock options awarded pursuant to the
Employment Agreements will vest 25% in the year awarded and 25% in each year for
the following three years. Each of the Employment Agreements provides that the
executive officer may receive such increases to his base salary and his cash
bonus as the Board of Directors may determine from time to time based upon
recommendations of the Compensation Committee of the Board of Directors. The
initial term of each of the Employment Agreements is three years, and each of
the agreements is renewable automatically upon expiration for consecutive one
year terms unless either party gives notice of nonrenewal at lease 90 days in
advance of the end of the current term.
The Company may terminate the Employment Agreements at any time for
cause. After April 1, 1998, the Company may also terminate them without cause
for any reason but must pay the terminated executive officer, upon termination,
an amount equal to two times the total cash compensation earned by him during
the immediately preceding fiscal year plus an amount equal to the then present
value of two years of normal health, life insurance and retirement benefits. The
Employment Agreements further provide for automatic termination of employment
upon a "change of control" of the Company, and in such event, for Messrs.
Puckett, Crane and Johnson to receive the same payments they would have received
if the Company had terminated their employment without cause. In the event of an
automatic termination upon a "change of control" of the Company, all incentive
stock options previously granted to Messrs. Puckett, Crane and Johnson will vest
immediately. The Employment Agreements, which may be terminated by the executive
officers on 90 day's notice to the Company, also contain geographically-broad,
one-year covenants not to compete and provisions restricting the right of the
executive officers to use confidential information gained while in the employ of
the Company.
Pursuant to an employment agreement dated September 24, 1996, as
amended April 29, 2997, Richard J. Post is entitled to a base annual salary of
$145,000 and is eligible to participate in an annual bonus compensation plan
each year in accordance with the Company's senior executive compensation formula
plan as implemented from time to time by the Compensation Committee of the Board
of Directors. The employment agreement does not have a fixed term. The
termination provisions of Mr. Post's employment agreement are the same as the
termination provisions of the Employment Agreements with Messrs. Puckett, Crane
and Johnson, including a provision with respect to a payment in the event of
automatic termination of employment upon a "change of control" of the Company.
Mr. Post's employment agreement also contains a geographically-broad, one-year
covenant not to compete and provisions restricting his use of confidential
information gained while in the employ of the Company
Pursuant to an employment agreement dated March 9, 1994, R. William
Moore, Jr. Is entitled to an annual salary of $100,000, which amount is to be
reviewed and adjusted from time to time. Mr. Moore is also entitled to
participate in an annual bonus compensation plan each year of his employment.
The employment agreement with Mr. Moore does not have a fixed term. If the
Company terminates his employment for any reason other than cause, the Company
must continue to pay his salary on a monthly basis and all accrued bonus for a
period of nine months following the date of termination unless he shall become
employed during such nine-month period and begin earning an amount equal to at
least 75% of his annual salary under the agreement. Mr. Moore's employment
agreement contains a 18-month covenant not to compete and provisions restricting
his use of confidential information gained while in the employ of the Company.
62
<PAGE>
PART III
================================================================================
Directors' Compensation
With the exception of Messrs. Duncan and McKinnon, who each receives
$1,000 for each Board or Committee meeting attended, directors do not receive
any cash compensation from the Company for their service as members of the Board
of Directors. All directors are reimbursed for reasonable expenses incurred by
them in attending Board and Committee meetings. Upon his appointment to the
Board, Dr. Duncan was granted an option to purchase 3,531 shares of Common Stock
at an exercise price of $7.51 per share 2,354 of which has been exercised.
Directors who are not employees of the Company (excluding Messrs. Welsh
and Paul) are entitled to participate in the Company's Outside Directors' Stock
Option Plan (the "Directors' Plan"). On the date of each annual meeting, the
Company grants an option under the Directors' Plan to purchase 2,000 shares of
Common Stock to each of W. Jack Duncan and John B. McKinnon at an exercise price
per share equal to the fair market value on such date.
Compensation Committee Members
Messrs. Duncan, McKinnon, Welsh and Paul served on the Compensation
Committee of the Board of Directors for the fiscal year ended September 30,
1997. The principal functions of the Compensation Committee are to review and
recommend annual salaries and bonuses for all corporate officers and management
personnel, review and recommend to the Board of Directors modifications in
employee benefit plans and administer the Company's 1992 Incentive Stock Option
Plan and Omnibus Stock Plan.
63
<PAGE>
PART III
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Item 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of January 23, 1998 by: (i) each
person known to the Company to beneficially own more than 5% of the Common
Stock; (ii) each director and nominee for director of the Company; (iii) each
executive officer named in the Summary Compensation Table; and (iv) all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
<S> <C>
Amount and Nature Percentage of
of Common
Name of Beneficial Owner Beneficial Ownership(1) Stock
------------------------ ----------------------- -----
Stephen R. Puckett (2)..................................... 1,221,472 10.4 %
Patrick J. Welsh (3)....................................... 966,177 8.3
Andrew M. Paul (3)......................................... 908,267 7.8
Welsh, Carson, Anderson & Stowe, V, L.P. (4)............... 884,829 7.6
The TCW Group, Inc. (5).................................... 827,400 7.1
The Northwestern Mutual Life Insurance Company (6)......... 679,305 5.8
Crown Advisors, Ltd. (7)................................... 710,263 6.1
Charles W. (Todd) Johnson (8).............................. 251,186 2.1
David Crane (9)............................................ 230,557 2.0
John B. McKinnon (10)...................................... 61,999 *
R. William Moore (11)...................................... 20,041 *
Richard J. Post (12)....................................... 13,021 *
W. Jack Duncan (13)........................................ 5,530 *
All Executive Officers and Directors as
a Group (11 persons) (14)................................ 2,798,831 24.0
- --------------------------
</TABLE>
* Less than 1%
(1) Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws
where applicable.
(2) The address of Mr. Puckett is 7621 Little Avenue, Suite 106,
Charlotte, North Carolina 28226. Includes 1,165,650 shares
held by two limited partnerships of which Mr. Puckett is the
sole general partner and 55,822 shares issuable upon exercise
of options that are exercisable within 60 days of January 23,
1998.
64
<PAGE>
PART III
================================================================================
(3) Includes 884,829 shares of Common Stock held by Welsh, Carson,
Anderson & Stowe, V, L.P. ("WCAS"). Each of Messrs. Welsh and
Paul is a general partner of the sole general partner of WCAS.
The address of Messrs. Welsh and Paul is 320 Park Avenue,
Suite 2500, New York, New York 10022.
(4) The address of WCAS is 320 Park Avenue, Suite 2500, New York,
New York 10022. Messrs. Welsh and Paul each serve as a general
partner of the sole general partner of WCAS.
(5) The address of the TCW Group, Inc. is 865 South Figueroa
Street, Los Angeles, CA 90017. The number of shares shown as
beneficially owned is based upon a statement on Schedule 13G
filed February 12, 1997, which indicates the reporting person
has sole voting and dispositive power over 827,400 shares
(6) The address of The Northwestern Mutual Life Insurance Company
is 720 E. Wisconsin Avenue, Milwaukee, Wisconsin 53202. The
number of shares shown as beneficially owned is based upon a
statement on Schedule 13G filed February 2, 1997, which
indicates the reporting person has sole voting and dispositive
power over 379,305 shares and shared voting and dispositive
power over an additional 300,000 shares.
(7) The address of Crown Advisors Ltd. is 60 East 42nd Street, New
York, New York 10165. The number of shares shown as
beneficially owned is based upon information provided to the
Company by Crown Advisors Ltd. Includes 402,400 shares held by
certain investment partnerships for which Crown Advisors Ltd.
serves as investment advisor, and as to which Crown Advisors
Ltd. has shared voting and investment power, 294,100 shares
held by a co-advisor to such partnerships and 13,763 shares
held by an affiliate of Crown Advisors Ltd.
(8) Includes 14,316 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(9) Includes 128,440 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(10) Includes 1,999 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(11) Includes 18,591 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(12) Includes 13,021 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(13) Includes 3,176 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
(14) Includes 240,775 shares issuable upon exercise of options that
are exercisable within 60 days of January 23, 1998.
65
<PAGE>
PART III
================================================================================
Item 13 - Certain Relationships and Related Transactions
None
66
<PAGE>
PART IV
================================================================================
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Included with this 10-K Report are the following Consolidated Financial
Statements:
<TABLE>
<CAPTION>
<S> <C>
Page
o Report of Independent Auditors 34
o Consolidated Statements of Income -- For the Years Ended September 30, 1995, 1996 and 1997 35
o Consolidated Balance Sheets as of September 30, 1996 and 1997 36
o Consolidated Statements of Shareholders' Equity -- For the Years Ended September 30, 1995, 1996
and 1997 37
o Consolidated Statements of Cash Flows -- For the Years Ended September 30,
1995, 1996 and 1997 38
o Notes to Consolidated Financial Statements -- For the Years Ended September
30, 1995, 1996 and 1997 39
(a)(2) Included with this 10-K Report is the following Consolidated Financial
Statement schedule:
o Report of Independent Auditors on Supplemental Schedule (included in
Consent of Ernst & Young LLP, independent auditors, filed as Exhibit 23.1
herewith) --
o Schedule II - Valuation and Qualifying Accounts for the years ended 74
September 30, 1995, 1996 and 1997
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
67
<PAGE>
PART IV
================================================================================
(b) No reports on Form 8-K were filed during the three months ended September
30, 1997.
(c) Exhibits
<TABLE>
<CAPTION>
<S> <C>
Previously Filed
With File Number
0-25176 *
----------------------------
Exhibit In As
No. Document Exhibit Exhibit Description
------- -------- ------- -------------------
3.1 (1) 3.1 Articles of Incorporation of the Company, as amended and restated.
3.2 (1) 3.2 Bylaws of the Company, as amended and restated.
4.1 (1) 4.1 Form of Common Stock Certificate.
4.2 (1) 4.2A First Amendment and Restatement of Amended and Restated Shareholders
Agreement dated as of October 31, 1994 by and among the Company, the
shareholders of the Company, parties thereto and FUNB as Trustee.
4.3 (6) 99.1 Rights Agreement dated October 15, 1996 between MedCath incorporated and
First Union National Bank of North Carolina, which includes the Articles
of Amendment to the amended and Restated Articles of Incorporation of the
Company setting forth the terms of the Series A Junior Participating
Preferred Stock as Exhibit A.
4.4 (10) 99.2 Appointment Agreement and First Amendment to Rights Agreement, by and
among the Company, First Union National Bank of North Carolina and
LaSalle National Bank, as successor Rights Agent.
10.1 (1) 10.1A First Amendment and Restatement of Amended and Restated Shareholders
Agreement dated as of October 31, 1994 by and among the Company, the
shareholders of the Company, parties thereto and FUNB as Trustee
10.2 (1) 10.9 Asset Purchase Agreement dated as of October 31, 1992 by and between
MedCath of Arizona, Inc. and Sun City Cardiac Center, Inc.
10.3 (1) 10.10 Partnership Agreement dated as of October 31, 1992 by and between MedCath
of Arizona, Inc. and Sun City Cardiac Center, Inc.
10.4 (1) 10.11 Management Agreement dated as of October 31, 1992 by and between Sun City
Cardiac Center, Inc. and Sun City Cardiac Center Associates.
10.5 (1) 10.26 Restated and Amended Agreement of Limited Partnership dated as of June 1,
1994 by and among MedCath of Texas, Inc., Hugo G. Blake, M.D., Shereef
Hilmy, II, M.D., Michael D. Evans, M.D., Norman M. Ramirez, M.D., Eduardo
D. Flores, M.D., Naji Kandalaft, M.D., Paul Manoharan, M.D., Benjamin
Robalino, M.D., Harish Koolwal, M.D., Augusto Villa, M.D., Filiberto S.
Rodriguez, M.D. and Jorge L. De La Garza, M.D. and Amendment thereto
dated as of August 16, 1994.
10.6 (1) 10.27 Loan Agreement dated as of August 19, 1994 by and between the McAllen
Partnership and Health Care REIT, Inc.
10.7 (1) 10.28 Note dated as of August 19, 1994 from the McAllen Partnership to Health
Care REIT, Inc. in the amount of $13,750,000.
10.8 (1) 10.30 Unconditional and Continuing Limited Guaranty dated as of August 19, 1994
by the Company in favor of Health Care REIT, Inc.
</TABLE>
68
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Previously Filed
With File Number
0-25176 *
----------------------------
In As
Exhibits Document Exhibit Exhibit Description
-------- -------- ------- -------------------
10.9** (1) 10.35 MedCath Incorporated 1992 Incentive Stock Option Plan.
10.10** (1) 10.36 MedCath Incorporated 1994 Omnibus Stock Plan.
10.11** (1) 10.37 MedCath Incorporated Outside Director's Stock Option Plan.
10.12** (1) 10.38 Option granted by the Company to W. Jack Duncan, dated September 8, 1994.
10.13 (1) 10.39 Stock Purchase Agreement dated as of October 1, 1994 by and among the
Company and each of the shareholders of PhysMed Management Services, Inc.
10.14 (1) 10.41 Shareholders' Agreement dated as of October 1, 1994 by and among the
Company and the shareholders of PhysMed Management Services, Inc. parties
thereto.
10.15 (1) 10.42 Amended and Restated Management Agreement dated as of October 1, 1994 by
and between AMC and PhysMed Management Services, Inc.
10.16 (1) 10.43 Security Agreement dated as of October 1, 1994 by and between AMC and
PhysMed Management Services, Inc.
10.17 (1) 10.44 Guaranty Agreement dated as of October 1, 1994 by the Company extended to
AMC for the benefit of PhysMed Management Services, Inc.
10.18 (1) 10.45 Limited Guaranty Agreement dated as of October 1, 1994 by the
shareholders of PhysMed Management Services, Inc. extended to PhysMed
Management Services, Inc. for the benefit of AMC.
10.19 (3) 2.1 Share Exchange Agreement and Plan of Reorganization dated as of April 7,
1995 by and among the Company, HealthTech and the shareholders of
HealthTech parties thereto.
10.20 (5) 10.51 Operating Agreement of the Little Rock Company dated as of July 11, 1995
by and among MedCath of Arkansas, Inc. and the several other parties
thereto.
10.21 (5) 10.51A1 First Amendment to Operating Agreement of the Little Rock Company dated
as of September 21, 1995 by and among MedCath of Arkansas, Inc. and the
several other parties thereto.
10.22 (5) 10.51A2 Second Amendment to Operating Agreement of the Little Rock Company dated
as of December 6, 1995 by and among MedCath of Arkansas, Inc. and the
several other parties thereto.
10.23 (4) 10.1 Construction and Term Loan Agreement dated December 7, 1995 between the
Little Rock Company and Health Care REIT, Inc.
10.24 (4) 10.2 Note dated as of December 7, 1995 from the Little Rock Company to Health
Care REIT, Inc. in the amount of $27,000,000.
10.25 (4) 10.3 Unconditional and Continuing Limited Guaranty dated as of December 7,
1995 by the Company in favor of Health Care REIT, Inc.
</TABLE>
69
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Previously Filed
With File Number
0-25176 *
----------------------------
In As
Exhibits Document Exhibit Exhibit Description
-------- -------- ------- -------------------
10.26 (5) 10.52 Operating Agreement of the Tucson Company dated as of September 14, 1995
by and among Southern Arizona Heart, Inc. and the several other parties
thereto.
10.27 (7) 10.42 Operating Agreement of the Tucson Cath Lab Company dated as of January
15, 1996 by and among Southern Arizona Heart, Inc. and the several other
parties thereto.
10.28 (7) 10.43 Loan Agreement dated July 18, 1996 between the Tucson Company and
Capstone Capital Corporation.
10.29 (7) 10.44 Promissory note dated July 18, 1996 from the Tucson Company and Capstone
Capital Corporation in the amount of $17,800,000.
10.30 (7) 10.45 Guaranty Agreement dated July 18, 1996 between the Company and Capstone
Capital Corporation
10.31 (7) 10.46 Agreement of Limited Partnership for the Austin Partnership dated as of
February 22, 1996 by and among Hospital Management IV, Inc. and the
several other parties thereto.
10.32 (7) 10.47 Operating Agreement of the Bakersfield Company dated as of June 14, 1996
by and among HHBF, Inc. and the several other parties thereto.
10.33*** (7) 10.48 Master Transaction Agreement dated July, 31, 1996 by and between MedCath
Incorporated and Heart Clinic, P.A.
10.34*** (7) 10.49 Service Agreement dated July 31, 1996 by and between Physician Management
of McAllen, Inc. and Heart Clinic, P.A.
10.35 (7) 10.50 Convertible Subordinated Promissory Note from MedCath Incorporated to
Heart Clinic, P.A. in the amount of $6,359,958.
10.36 (7) 10.51 Convertible Subordinated Promissory Note from MedCath Incorporated to
Heart Clinic, P.A.
10.37 (8) 10 Operating Agreement of the Phoenix Company dated January 6, 1997 by and
among AHH Management, Inc. and several other parties thereto.
10.38 (9) 10.1 Standard Form of Agreement between Owner and Contractor dated as of May
5, 1997, by and between the Phoenix Company and Chanen Construction
Company.
10.39 (11) 10.39 Standard Form of Agreement between Owner and Contractor dated as of
September 9, 1997, by and between the Bakersfield Company and S.C.
Anderson, Inc. (In accordance with Rule 202 of Regulation S-T, this exhibit
is being filed in paper pursuant to a continuing hardship exemption.)
10.40 (11) 10.40 Standard Form of Agreement between Owner and Contractor dated as of August
26, 1997, by and between the Austin Partnership and Faulkner Construction
Company. (In accordance with Rule 202 of Regulation S-T, this exhibit is
being filed in paper pursuant to a continuing hardship exemption.)
</TABLE>
70
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
<S> <C>
Previously Filed
With File Number
0-25176 *
----------------------------
In As
Exhibits Document Exhibit Exhibit Description
-------- -------- ------- -------------------
10.41 (11) 10.41 Operating Agreement of the Dayton Company dated March 20, 1997 by and
among DTO Management, Inc. and several other parties thereto.
10.42 (11) 10.42 Credit Agreement dated as of July 28, 1997 by and among the Company and
NationsBank, N.A., as agent for several other lenders thereto.
10.43 (11) 10.43 Note dated as of July 28, 1997 from the Company to NationsBank, N.A., as
agent for several other lenders thereto in the amount of $20,000,000.
10.44 (11) 10.44 Loan Agreement dated as of August 7, 1997 by and among the Phoenix Company
and NationsBank, N.A, as agent for several other lenders thereto.
10.45 (11) 10.45 Construction Loan Notes dated as of August 7, 1997 from the Phoenix Company
to NationsBank, N.A. and several other lenders thereto in the amount of
$27,545,000 in the aggregate.
10.46 (11) 10.46 Working Capital Loan Notes dated as of August 7, 1997 from the Phoenix
Company to NationsBank, N.A. and several other lenders thereto in the
amount of $2,500,000 in the aggregate.
10.47 (11) 10.47 Share Exchange Agreement and Plan of Reorganization dated as of June 30,
1997 by and among Shareholders of Pima Heart Associates and the Company.
10.48 (11) 10.48 Service Agreement dated as of June 30, 1997 between Pima Heart
**** Associates and the Company.
10.49 (11) 10.49 Liquidated Damages Agreement dated as of June 30, 1997 by and among
**** Shareholders of Pima Heart Associates and the Company.
10.50 (11) 10.50 Services and Billing Agreement dated as of October 1, 1997 between the
Tucson Company and the Tucson Cath Lab Company.
10.51 (11) 10.51 Lease Agreement dated as of October 1, 1997 between the Tucson Company
and the Tucson Cath Lab Company.
10.52 ** (11) 10.52 Employment Agreement dated as of October 1, 1997 by and between the
Company and Stephen R. Puckett.
10.53 ** (11) 10.53 Employment Agreement dated as of October 1, 1997 by and between the
Company and David Crane.
10.54 ** (11) 10.54 Employment Agreement dated as of April 29, 1997 by and between the
Company and Richard J. Post.
10.55 ** (11) 10.55 Employment Agreement dated as of October 1, 1997 by and between the
Company and Charles W. Johnson.
10.56 ** (11) 10.56 Employment Agreement dated as of March 9, 1994 by and between the Company
and R. William Moore, Jr.
10.57 ** (11) 10.57 Employment Agreement dated as of August 28, 1995 by and between the
Company and Thomas K. Hearn.
10.58 ** (11) 10.58 Employment Agreement dated as of August 7, 1997 by and between the
Company and Kenneth Petronis.
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
Previously Filed
With File Number
0-25176 *
----------------------------
In As
Exhibits Document Exhibit Exhibit Description
-------- -------- ------- -------------------
10.59 (11) 10.59 First Amendment dated February 4, 1997, to the Construction and Term Loan
Agreement dated December 7, 1995 between the Little Rock Company and Health
Care REIT, Inc.
21.1 (11) 21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
27 (11) 27 Financial Data Schedule (included in the EDGAR filing only.)
</TABLE>
- -----------------------------
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
*** Portions of these agreements have been deleted pursuant to a
previously-approved request for confidential treatment.
**** Portions of these agreements have been deleted pursuant to a request
for confidential treatment made under rule 24b-2 under the securities
exchange act of 1934, as amended.
- -----------------------------
(1) Registration Statement on Form S-1.
(2) Form 10-Q for the quarterly period ended December 31, 1994.
(3) Form 8-K dated April 9, 1995.
(4) Form 10-Q for the quarterly period ended December 31, 1995.
(5) Form 10-K for the year ended September 30, 1995
(6) Form 8-A dated October 18, 1996.
(7) Form 10-K for the year ended September 30, 1996
(8) Form 10-Q for the quarterly period ended March 31, 1997.
(9) Form 10-Q for the quarterly period ended June 30, 1997.
(10) Form 8-A/A Amendment No. 1 dated September 12, 1997
(11) Form 10-K for the year ended September 30, 1997
as previously filed on December 24, 1997.
72
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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 7, 1998 By /s/ Richard J. Post
---------------------------
Chief Financial Officer, Secretary,
and Treasurer
73
MedCath Incorporated
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged to Charged to Other Balance at End
Beginning of Costs and Accounts Deductions of
Description Period Expenses (Describe) (Describe) Period
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for losses in collection
of current accounts receivable
Year ended September 30, 1995 $40 $24 - - $64
Year ended September 30, 1996 $64 $735 - $382 (1) $417
Year ended September 30, 1997 $417 $2,083 - $ 1,011 (1) $1,489
(1) Uncollectible accounts written off.
</TABLE>
74
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-92664, Form S-8 No. 333-1310 and Form S-8 No. 333-29471)
pertaining to the MedCath Incorporated 1992 Incentive Stock Option Plan, the
MedCath Incorporated Omnibus Stock Plan and the MedCath Incorporated Outside
Directors' Stock Option Plan of our report dated November 7, 1997, except for
Note 16, as to which the date is April 9, 1998, with respect to the consolidated
financial statements and schedule included in the Annual Report on Form 10-K/A
No. 2 of MedCath Incorporated for the year ended September 30, 1997, as amended
in this Form 10-K/A No. 3.
Charlotte, North Carolina
July 6, 1998
