<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A NO. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
Commission file number 0-25176
------------------------------------------------------
MEDCATH INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1635096
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226
- --------------------------------------------------------------------------------
(Address of principal executive officers)
(Zip Code)
(704) 541-3228
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
As of April 30, 1998, there were 11,787,571 Common Shares outstanding.
<PAGE>
22
MEDCATH INCORPORATED
FORM 10-Q/A NO. 1
March 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
No.
---
PART I - FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
Item 1. Condensed consolidated financial statements
o Condensed consolidated statements of income 3
o Condensed consolidated balance sheets 4
o Condensed consolidated statements of cash flows 5
o Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of
financial condition and results of operations 10-14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------ --------------------------
1997 1998 1997 1998
------------------------------ --------------------------
<S> <C> <C> <C> <C>
Net revenue $ 26,709 $ 49,713 $ 49,564 $ 90,511
Operating expenses:
Medical supplies and other 10,814 20,112 19,410 36,965
Personnel costs 6,992 13,708 13,137 25,186
Depreciation 1,783 3,324 3,273 6,395
Amortization 932 2,281 1,682 4,287
Provision for doubtful accounts 487 1,409 938 2,842
Marketing, general and administrative 1,797 2,180 3,699 4,118
------------------------------ --------------------------
Total operating expenses 22,805 43,014 42,139 79,793
------------------------------ --------------------------
Income from operations 3,904 6,699 7,425 10,718
Interest expense (834) (2,665) (1,536) (5,022)
Interest income 582 401 1,257 911
Equity in net earnings of unconsolidated subsidiaries - 12 - 12
Minority interest in earnings of consolidated entities (270) (1,572) (840) (1,758)
------------------------------ --------------------------
Income before income taxes 3,382 2,875 6,306 4,861
Provision for income taxes (1,285) (1,121) (2,454) (1,896)
------------------------------ --------------------------
Net income $ 2,097 $ 1,754 $ 3,852 $ 2,965
============================== ==========================
Net income per weighted average share: $ 0.19 $ 0.15 $ 0.35 $ 0.25
============================== ==========================
Net income per share assuming dilution: $ 0.18 $ 0.14 $ 0.33 $ 0.24
============================== ==========================
Weighted average number of common and common
equivalent shares outstanding (in thousands): 11,147 11,669 11,141 11,669
============================== ==========================
Weighted average number of common and common
equivalent shares outstanding assuming dilution (in thousands): 11,664 12,368 11,667 12,286
============================== ==========================
</TABLE>
See accompanying notes.
3
<PAGE>
MedCath Incorporated
Unaudited Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30, March 31,
------------------------ -----------------------
1997 1998
------------------------ -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,607 $ 12,921
Short-term investments 25,344 5,610
Accounts receivable, net of allowance 22,360 38,148
Medical supplies 3,168 4,319
Prepaid expenses and other current assets 668 1,067
------------------------ -----------------------
Total current assets 69,147 62,065
Property, plant and equipment, net of accumulated depreciation 139,185 194,482
Other assets 2,470 6,611
Organization and start-up costs, net of accumulated amortization 13,737 17,123
Advances to physician groups 8,194 10,679
Intangible assets, net of accumulated amortization 26,275 42,534
------------------------ -----------------------
Total assets $ 259,008 $ 333,494
======================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,818 $ 5,569
Distribution payable to minority interests 1,081 2,251
Accrued liabilities 9,648 12,330
Current portion of long-term debt 5,503 13,357
Current portion of obligations under capital leases 599 611
------------------------ -----------------------
Total current liabilities 21,649 34,118
Deferred income taxes 3,731 4,298
Long-term debt 96,703 147,644
Obligations under capital leases 2,160 1,854
------------------------ -----------------------
Total liabilities 124,243 187,914
Minority interests in equity of consolidated entities 7,628 6,540
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, and 11,168,603
and 11,669,359 shares issued and outstanding
at September 30, 1997 and March 31, 1998, respectively 112 117
Paid-in capital 109,065 117,998
Retained earnings 17,960 20,925
------------------------ -----------------------
Total shareholders' equity 127,137 139,040
------------------------ -----------------------
Total liabilities, minority interests and shareholders' equity $ 259,008 $ 333,494
======================== =======================
</TABLE>
See accompanying notes.
4
<PAGE>
MEDCATH INCORPORATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------------------
1997 1998
------------------- ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 3,852 $ 2,965
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,040 10,680
Equity in net earnings of unconsolidated subsidiaries - (12)
Minority interest (404) (374)
Deferred income taxes 78 567
(Increase) decrease in current assets:
Accounts receivable (8,503) (14,588)
Medical supplies (1,107) (1,151)
Prepaid expenses and other current assets (267) (549)
Increase (decrease) in current liabilities:
Accounts payable 412 787
Distribution payable to minority interest 764 1,171
Accrued liabilities 4,081 2,682
Other (43) 15
------------------- ------------------
Net cash provided by operating activities 3,903 2,193
INVESTING ACTIVITIES
Purchases of property, plant and equipment (38,496) (61,779)
Start-up and organization costs (4,852) (9,010)
Advances to physician groups (1,114) (2,689)
Repayments of advances to physician groups 664 204
Net sales of short-term investments 19,099 18,126
Acquisition of management contracts - (5,667)
Other investing activities - (1,466)
------------------- ------------------
Net cash used in investing activities (24,699) (62,281)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 26,671 59,447
Repayments of long-term debt (2,988) (4,035)
Repayments of obligations under capital leases (233) (294)
Investments by minority partners 3,106 716
Other financing activities 90 (432)
------------------- ------------------
Net cash provided by financing activities 26,646 55,402
------------------- ------------------
Net increase (decrease) in cash and equivalents 5,850 (4,686)
Cash and cash equivalents, beginning of period 5,026 17,607
------------------- ------------------
Cash and cash equivalents, end of period $ 10,876 $ 12,921
=================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 1- General
- ---------------
The accompanying unaudited condensed consolidated financial statements of
MedCath Incorporated (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the statements of the unaudited interim periods
include all adjustments necessary for fair presentation of results for the
periods and all such adjustments are of a normal recurring nature. The
accompanying unaudited condensed consolidated results of operations for the
three and six month periods ended March 31, 1998, are not necessarily indicative
of the results that may be expected for the year ending September 30, 1998. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K (as
amended) for the year ended September 30, 1997. Unless otherwise specified,
capitalized terms used herein are used as defined in such Annual Report on Form
10-K (as amended).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates and assumptions.
Note 2 - 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.
Note 3 - Newly Issued Accounting Standard
- -----------------------------------------
In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, although early application is encouraged.
Initial application of SOP 98-5 should be as of the beginning of the fiscal year
in which it is first adopted and should be reported as a cumulative effect of a
change in accounting principle.
The Company currently intends to early adopt SOP 98-5 on October 1, 1998. Upon
adoption, the Company estimates it will incur a cumulative effect of a change in
accounting principle that will range from $12.0 to $18.0 million. This estimate
includes net cost capitalized as of March 31, 1998, costs to be capitalized from
April 1, 1998 through September 30, 1998, and is net of additional amortization
expected to be incurred from April 1, 1998 through September 30, 1998.
6
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 4 - Long-Term Debt
- -----------------------
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
--------------------------------------
<S> <C> <C>
The REIT Loans (as defined below) $ 58,781 $ 74,043
The Phoenix Loan 11,133 27,643
Convertible Subordinated Debt 4,452 6,019
Notes payable to various equipment lenders 27,638 53,164
Other notes payable 202 131
--------------------------------------
102,206 161,001
Less current portion (5,503) (13,357)
======================================
$ 96,703 $ 147,644
======================================
</TABLE>
The Company entered into mortgage loans with real estate investment trusts
("REITs") from 1994 to 1998 for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas, and Tucson Heart Hospitals and
the Heart Hospital of Austin (collectively the "REIT Loans"). The Company
entered into the REIT Loan for the Heart Hospital of Austin in November of 1997.
The interest rates on the REIT Loans 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 March
31, 1998, the interest rates on the REIT Loans ranged from 9.50% to 11.54%.
In December 1997, the Company obtained financing from an equipment lender in the
amount of $7 million for the purpose of financing certain medical equipment and
fixtures in the Diagnostics Division. The term of the borrowing is for six years
and the interest rate is based on a fixed premium above the four-year Treasury
note rate and the principal and interest is payable monthly. As of March 31,
1998, the interest rate was 8.09%. Borrowings under the financing agreement are
secured by a pledge of the Company's interest in the financed medical equipment
and fixtures.
In January 1998, the Company obtained financing from an equipment lender
providing up to $18 million for the purpose of financing certain medical
equipment at the Arizona Heart Hospital located in Phoenix, Arizona. The term of
the borrowing is for seven years and the interest rate is based on a fixed
premium above the seven-year Treasury note rate and the principal and interest
is payable monthly. As of March 31, 1998, the interest rate was 9.07%.
Borrowings under the financing agreement are secured by a pledge of the
Company's interest in the financed medical equipment.
7
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 5 - Earnings per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------------------------------------
1997 1998 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (A) $ 2,097 $ 1,754 $ 3,852 $ 2,965
Interest Expense - Convertible
Subordinated Debt 28 27 54 54
==============================================================
Adjusted net income (B) $ 2,125 $ 1,781 $ 3,906 $ 3,019
==============================================================
Denominator:
Weighted Average Common Shares (C) 11,147 11,669 11,141 11,669
Outstanding
Dilutive effect of stock options 199 204 208 210
Assumed issuance of Contingently
Issuable Shares - 115 - 58
Assumed conversion of Convertible
Subordinated Debt into Common Shares 318 380 318 349
==============================================================
Adjusted weighted average shares (D) 11,664 12,368 11,667 12,286
==============================================================
Basic earnings per share (A)/(C) $ 0.19 $ 0.15 $ 0.35 $ 0.25
==============================================================
Diluted earnings per share (B)/(D) $ 0.18 $ 0.14 $ 0.33 $ 0.24
==============================================================
</TABLE>
Note 6 - Business Combinations and New Operations
- -------------------------------------------------
In October 1997, the Company acquired a management service organization, through
the issuance of common stock valued at approximately $7 million, which changed
its name to MedCath Physician Management, Inc., ("MPM"). MPM has a 40-year
contract to manage Pima Heart Associates ("Pima Heart"), the Company's fourth
Managed Practice. Pima Heart is a 17-member cardiologist group located in
Tucson, Arizona. The intangible asset represented by the management contract
acquired is being amortized over a 40-year period, which is the remaining term
of the management contract. The Company accounted for the acquisition as a
purchase business combination. The Company's consolidated results of operations
include the operating results and financial position, which are not significant,
of MPM from the date of acquisition.
In October 1996, the Company agreed to issue a contingent subordinated
promissory note in connection with the acquisition of a 40-year contract to
manage Heart Clinic, P.A. ("Heart Clinic") a multi-physician cardiologist group
located in McAllen, Texas. The $1,567,000 note was issued in January 1998. The
amount of this note was calculated based on "Standard Net Production Levels" for
each physician practicing in Heart Clinic and was required to be made regardless
of the employment status with the practice at the time of payment, assuming that
the production levels were met, and was not a profit sharing agreement.
Accordingly, this additional amount was considered an addition to the
acquisition cost of the management contract, is recorded as an intangible asset
and is being amortized over the remaining term of the management contract.
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.
8
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 6 - Business Combinations and New Operations (continued)
- -------------------------------------------------------------
In January 1998, the Company announced that it had entered into an agreement
with Franciscan Health System of Ohio Valley, Inc. ("FHSOV") to locate the
Company's previously announced Dayton Heart Hospital on the grounds of the
Franciscan Medical Center - Dayton Campus. FHSOV will become a 30% investor in
the hospital, with the Company and local physician investors holding the
remaining interest. Under the terms of the agreement, the Company will be
managing member, with responsibility for the day-to-day operations of the
hospital.
The Company has announced plans to open two new Fixed-Site Facilities by the end
of fiscal year 1998. The Company has agreed to partner with local cardiologists
and own a majority interest in the first facility located in Colorado Springs,
Colorado, and has entered into a long-term agreement to develop and manage the
second facility located in Dakota Dunes, South Dakota. These two cath labs, in
addition to the previously announced cath lab under development in Montgomery,
Alabama, will bring the total number of mobile and fixed-site cath labs operated
by the Company to 33.
In January 1998, MPM acquired a 40-year contract to manage a seven-physician
cardiology practice, Valley Cardiology, Inc. ("Valley Cardiology"), located in
McAllen, Texas, for approximately $5.5 million in cash and equity. Valley
Cardiology is the Company's fifth Managed Practice. The intangible asset
represented by the management contract acquired is being amortized over a
40-year period, which is the remaining term of the management contract. The
Company's consolidated results of operations and financial position include the
management fees earned under this contract from the date of acquisition.
In February 1998, the Company announced that is had formed a joint venture to
construct a new heart hospital to be located in Albuquerque, New Mexico, which
will be the Company's eighth heart hospital. To be named the Heart Hospital of
New Mexico, the hospital will be a three-way venture between MedCath, two
leading local physician groups and St. Joseph Healthcare System, a leading
not-for-profit system in Albuquerque.
In April 1998, the Company announced that it had completed a transaction with
Dayton, Ohio-based Dayton Heart Center, Inc., under which MedCath would provide
long-term management services to the group of 11 cardiologists. Dayton Heart
Center, Inc. is the Company's sixth Managed Practice.
Note 7 - Pending Transaction
- ----------------------------
In March 1998, MedCath, Kohlberg Kravis Roberts & Co. ("KKR") and Welsh Carson,
Anderson & Stowe ("Welsh, Carson") jointly announced that they had signed a
definitive agreement pursuant to which a new company formed by KKR and Welsh,
Carson, in which certain members of MedCath's senior management will be
investors, will acquire MedCath in a merger for $19 per share in cash. The
Company expects to hold a special meeting of its shareholders in July to vote on
a proposal to approve the merger.
9
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Unaudited Condensed Consolidated
Financial Statements and accompanying notes. All References to a "Note" are to
the "Notes to Unaudited Condensed Consolidated Financial Statements" contained
herein. Unless otherwise specified, capitalized terms used herein are used as
defined in the Company's Annual Report on Form 10-K for the year ended September
30, 1997.
Acquisitions and New Operations
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 Heart"), the Company's
fourth managed practice. Pima Heart is a 17-member cardiologist group located in
Tucson, Arizona.
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.
In January 1998, the Company announced that it had entered into an agreement
with Franciscan Health System of Ohio Valley, Inc. ("FHSOV") to locate the
Company's previously announced Dayton Heart Hospital on the grounds of the
Franciscan Medical Center - Dayton Campus. FHSOV will become a 30% investor in
the hospital, with the Company and local physician investors holding the
remaining interest. Under the terms of the agreement, the Company will be
managing member, with responsibility for the day-to-day operations of the
hospital.
The Company has announced plans to open two new Fixed-Site Facilities by the end
of fiscal year 1998. The facilities will be located in Colorado Springs,
Colorado, and Dakota Dunes, South Dakota, and will further strengthen the
Company's Diagnostics Division. The Company has agreed to partner with local
cardiologists and own a majority interest in the Colorado Springs facility and
has entered into a long-term agreement to develop and manage the Dakota Dunes
facility. These two cath labs, in addition to the previously announced cath lab
under development in Montgomery, Alabama, will bring the total number of mobile
and fixed-site cath labs operated by the Company to 33.
In January 1998, MPM acquired a 40-year contract to manage a seven-physician
cardiology practice, Valley Cardiology, Inc. ("Valley Cardiology"), located in
McAllen, Texas. In April 1998, the Company announced that it had completed a
transaction with Dayton, Ohio-based Dayton Heart Center, Inc., under which
MedCath would provide long-term management services to the group of 11
cardiologists. Including these transactions, MedCath manages six medical
practices comprised of approximately 115 physicians.
In February 1998, the Company announced that is had formed a joint venture to
construct a new heart hospital to be located in Albuquerque, New Mexico, which
will be the Company's eighth heart hospital. To be named the Heart Hospital of
New Mexico, the hospital will be a three-way venture between MedCath, two
leading local physician groups and St. Joseph Healthcare System, a leading
not-for-profit system in Albuquerque.
10
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Pending Transaction
In March 1998, MedCath, Kohlberg Kravis Roberts & Co. ("KKR") and Welsh Carson,
Anderson & Stowe ("Welsh, Carson") jointly announced that they had signed a
definitive agreement pursuant to which a new company formed by KKR and Welsh,
Carson, in which certain members of MedCath's senior management will be
investors, will acquire MedCath in a merger for $19 per share in cash. The
Company expects to hold a special meeting of its shareholders in July to vote on
a proposal to approve the merger.
Results of Operations
- ---------------------
The following table sets forth, for the periods presented, the percentage of the
Company's net revenue represented by the net revenue of each of the Company's
operating divisions and by certain items reflected in the Unaudited Condensed
Consolidated Statements of Income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------
1997 1998 1997 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Diagnostics Division 36.8% 18.6% 38.7% 19.4%
Practice Management Division 18.4 18.3 19.7 17.9
Hospital Division 44.8 62.5 41.6 61.9
Corporate and Other - 0.6 - 0.8
-------------------------------------------------------------
Total net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical supplies, personnel & other operating expense 66.7 68.0 65.6 68.7
Depreciation and amortization expense 10.2 11.3 10.0 11.8
Provision for doubtful accounts 1.8 2.8 1.9 3.1
Marketing, general and administrative expense 6.7 4.4 7.5 4.6
-------------------------------------------------------------
Total operating expenses 85.4 86.5 85.0 88.2
-------------------------------------------------------------
Income from operations 14.6 13.5 15.0 11.8
Interest expense (3.1) (5.3) (3.1) (5.5)
Interest income 2.2 0.8 2.5 1.0
Minority interest in earnings of consolidated entities (1.0) (3.2) (1.7) (1.9)
-------------------------------------------------------------
Income before income taxes 12.7 5.8 12.7 5.4
Provision for income taxes (4.8) (2.3) (4.9) (2.1)
-------------------------------------------------------------
Net income 7.9% 3.5% 7.8% 3.3%
=============================================================
</TABLE>
11
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Results of Operations (continued)
- ---------------------------------
Net revenue
Consolidated net revenue for the second quarter and six months ended March 31,
1998, increased 86.1% to $49.7 million and 82.6% to $90.5 million, respectively,
over the comparable prior year periods. The respective increases of $23.0
million and $40.9 million are primarily attributable to increased net revenue in
the Hospital Division. The increase in net revenue in the Hospital Division is
primarily due to the March 1997 opening of the Company's second Heart Hospital,
the Arkansas Heart Hospital, which generated net revenue of $13.6 million and
$25.6 million for the second quarter and six months ended March 31, 1998.
Additionally, net revenue at the McAllen Heart Hospital for the second quarter
and six months ended March 31, 1998, increased 16.7% to $12.5 million and 17.0%
to $22.7 million, respectively, over the comparable prior year periods, due
primarily to increased procedure volumes. The Tucson Heart Hospital, which
opened in October 1997, generated net revenue of $4.9 million and $7.7 million
for the second quarter and six months ended March 31, 1998 and provided the
remaining increase in net revenue in the Hospital Division.
Net revenue in the Practice Management Division for the second quarter and six
months ended March 31, 1998, increased 85.3% to $9.1 million and 66.3% to $16.2
million, respectively, over the comparable prior year periods. The respective
increases of $4.2 and $6.5 million are primarily attributable to the October
1997 acquisition of the contract to manage Pima Heart and to the January 1998
acquisition of the contract to manage Valley Cardiology. All other changes in
net revenue of individual Managed Practices over the prior periods were not
significant.
Net revenue in the Diagnostics Division for the second quarter and six months
ended March 31, 1998, decreased 6.1% to $9.2 million and 9.4% to $17.5 million,
respectively, over the comparable prior year periods. The respective decreases
of $597,000 and $1.8 million are partially due to the scheduled July 1997
closing of the Fixed-Site Facility located in Tucson, Arizona, and also due to
lower procedure volumes at several of the Company's other diagnostic facilities.
Operating Expenses and Income from Operations
Consolidated operating expenses for the second quarter and six months ended
March 31, 1998, increased 88.6% to $43.0 million and 89.4% to $79.8 million,
respectively, over the comparable prior year periods. The increase was
attributable primarily to operating expenses in the Hospital Division.
Consolidated income from operations for the second quarter and six months ended
March 31, 1998, increased 71.6% to $6.7 and 44.3% to $10.7 million,
respectively, over the comparable prior year periods due to an overall increase
in consolidated net revenue. Operating margins for the second quarter and six
months ended March 31, 1998, decreased to 13.5% from 14.6%, and to 11.8% from
15.0%, respectively, over the comparable prior year periods. Consolidated EBITDA
margin for the second quarter remained constant at 24.8% and, for the six months
ended March 31, 1998, EBITDA margin decreased to 23.6% from 25.0% over the
comparable prior year periods. These decreases were primarily attributable to
the substantial growth in the Practice Management and Hospital Divisions which
operate at lower margins than those realized in the Diagnostics Division.
Income from operations at the Hospital Division for the second quarter and six
months ended March 31, 1998, increased 366.1% to $3.9 million and 205.2% to $5.7
million, respectively, over the comparable prior year periods. This increase is
primarily due to the opening of the Arkansas Heart Hospital in March 1997 and
improved operating results at the McAllen Heart Hospital. Operating margins for
the second quarter and six months ended March 31, 1998, increased to 12.5% and
10.1%, respectively, over the comparable prior year periods. EBITDA margins for
the second quarter and six months ended March 31, 1998, increased to 25.4% from
19.3%, and to 23.8% from 21.5%, respectively, over the comparable prior year
periods. The Tucson Heart Hospital, which opened in October 1997, continues to
experience operating losses during its initial months of operation. The
operating profits at the McAllen and Arkansas Heart Hospitals offset the
operating losses at the Tucson Heart Hospital resulting in the overall increase
to operating and EBITDA margins. The McAllen and Arkansas Heart Hospitals had
EBITDA margins of 26.2% and 33.8%, respectively, for the quarter ended March 31,
1998, and 25.7% and 32.4%, respectively, for the six months ended March 31,
1998.
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MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Income from operations in the Practice Management Division for the second
quarter and six months ended March 31, 1998, increased 38.2% to $889,000 and
22.0% to $1.4 million, respectively, over the comparable prior year periods.
This increase is primarily due to income from the contracts to manage Pima Heart
and Valley Cardiology, which were acquired in October 1997 and January 1998,
respectively. The Practice Management Division's operating margins for the
second quarter and six months ended March 31, 1998, decreased to 9.8% from
13.1%, and to 8.8% from 12.0%, respectively, over the comparable prior year
periods. The Practice Management Division's EBITDA margins for the second
quarter and six months ended March 31, 1998, decreased to 12.5% from 15.5%, and
to 11.5% from 14.4%, respectively, over the comparable prior year periods. These
decreases are due to the structure of the contract to manage Pima Heart which
includes in its revenues the reimbursement of expenses incurred in managing the
practice thus impacting the overall margins of the Division.
Income from operations in the Diagnostics Division for the second quarter and
six months ended March 31, 1998, decreased 8.4% to $3.3 million and 11.1% to
$6.2 million, respectively, over the comparable prior year periods due primarily
to lower procedure volumes at several of the Company's diagnostic facilities.
Operating margins in the Diagnostics Division for the second quarter and six
months ended March 31, 1998, decreased to 36.3% from 37.2%, and to 35.2% from
35.9%, respectively, over the comparable prior year periods. This decrease is
primarily due to the additional depreciation expense incurred from new equipment
added throughout fiscal year 1997. EBITDA margins in the Diagnostics Division
for the second quarter and six months ended March 31, 1998, increased to 49.7%
from 48.2%, and to 48.9% from 46.6%, respectively, over the comparable prior
year periods due primarily to an increase in consulting and management fee
income.
Marketing, general and administrative expenses for the second quarter and six
months ended March 31, 1998, increased 21.3% and 11.3%, respectively, over the
comparable prior year periods primarily as a result of the Company's continued
investment in corporate infrastructure to accommodate growth. In the second
quarter of 1998, the Company continued to add personnel to the Human Resources,
Information Systems and Accounting departments. These expenses as a percent of
consolidated net revenue have decreased to 4.6% for the six months ended March
31, 1997, from 7.5% during the comparable prior year period demonstrating the
Company's ability to accommodate growth without a corresponding increase in
corporate overhead.
Interest Expense and Interest Income
Interest expense for the second quarter and six months ended March 31, 1998,
increased 219.5% to $2.7 million and 226.8% to $5.0 million, respectively, over
the comparable prior year periods primarily as the result of interest incurred
on borrowings at the Tucson and Arkansas Heart Hospitals which opened during the
last 12 months. Substantially all of the property, plant and equipment at the
hospitals is financed using borrowings that bear interest at rates ranging from
8.5% to 11.54%. Interest income for the second quarter and six months ended
March 31, 1998, decreased to $401,000 and $911,000, respectively, over the
comparable prior year periods due to a decrease in average short-term investment
balances.
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MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Liquidity and Capital Resources
- -------------------------------
Operating Cash Flows
Net cash provided by operating activities was $2.2 million for the six months
ended March 31, 1998. Accounts receivable increased $15.8 million during the six
months ended March 31, 1998, primarily as a result of the opening of the Tucson
Heart Hospital and increased revenue at the McAllen and Arkansas Heart
Hospitals. At March 31, 1998, the Company had working capital of $27.9 million,
including $18.5 million of cash and short-term investments and $38.1 million in
accounts receivable.
Investing Cash Flows
During the six months ended March 31, 1998, the Company utilized a net of $62.3
million in investing activities primarily for the construction and development
of Heart Hospitals consisting of $10.2 million for the Tucson Heart Hospital,
$37.9 million for the Arizona Heart Hospital, $10.0 million for the Heart
Hospital of Austin and $5.1 million for the Company's other Heart Hospitals. The
Diagnostics Division purchased $4.2 million of new equipment during the six
months ended March 31, 1998. The additional acquisition of management contracts
in the Practice Management Division totaled $5.7 million, and additional
physician advances totaled $2.7 million during the six month period. The Company
utilized a net of $4.6 million in other operations. Offsetting these outflows
was $18.1 million provided from the sale of short-term investments.
Financing Cash Flows
Financing activities provided $55.4 million during the six month period ended
March 31, 1998, primarily from loan proceeds utilized for the construction and
development of the Arizona and Tucson Heart Hospitals, and the Heart Hospital of
Austin. In addition, the Company's Diagnostics Division borrowed $7.0 million
for the purpose of financing certain medical equipment and fixtures.
In November 1997, the Company entered into a mortgage loan with a REIT 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. As of
March 31, 1998, the interest rate on the REIT was 9.50%. The Heart Hospital of
Austin's REIT provided $14.3 million of the total loan proceeds during the first
six months of 1998.
In December 1997, the Company obtained a financing commitment for up to $29
million for the purpose of financing the land acquisition, construction and a
portion of the working capital costs of the Bakersfield Heart Hospital. The
interest rate will be at a fixed premium above LIBOR and the outstanding
principal balance will be due and payable in full three years from closing of
the note, if the Company's optional extension of one year is not exercised. The
transaction is expected to be completed in the Company's third fiscal quarter.
In January 1998, the Company obtained financing from an equipment lender
providing up to $18 million for the purpose of financing certain medical
equipment at the Arizona Heart Hospital located in Phoenix, Arizona. The term of
the borrowing is for seven years and the interest rate is based on a fixed
premium above the seven-year Treasury note rate and the principal and interest
is payable monthly. As of March 31, 1998, the interest rate was 9.07%.
Borrowings under the financing agreement are secured by a pledge of the
Company's interest in the financed medical equipment.
The Company expects that each of its Heart Hospitals will require working
capital advances to fund a portion of the pre-opening costs and to fund the
operations subsequent to opening in the initial start-up phase of the hospital.
Substantial investments will be required during the development phase, and the
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Company expects operating losses and negative cash flow will be incurred during
the initial months of operation of each Heart Hospital.
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.
Disclosure Regarding Forward-Looking Statements
- -----------------------------------------------
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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
10.1** Master Transaction Agreement dated December 12, 1997
by and between MedCath Physician Management, Inc. and
Valley Cardiology, P.A.
10.2** Service Agreement dated December 12, 1997 between
MedCath Physician Management, Inc. and Valley
Cardiology, P.A.
10.3 Amendment to Operating Agreement of the Dayton
Company dated December 1997 by and among DTO
Management, Inc. and several other parties thereto.
10.4 Operating Agreement of the Heart Hospital of New
Mexico dated as of December 1, 1997 by and among NM
Hospital Management, Inc. and several other parties
thereto.
10.5 Agreement and Plan of Merger dated as of March 12,
1998 by and among the Company, MCTH Acquisition, Inc.
and MedCath Holdings, Inc.
27 Financial Data Schedule (EDGAR version only)
* All exhibits have been included on Form 10-Q for the
quarterly period ended March 31, 1998, as previously filed
on May 7, 1998.
** 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.
(b) Reports on Form 8-K filed during the three months ended
March 31, 1998 are as follows:
Date of Report Items Reported
-------------- --------------
March 23, 1998 Item 5. OTHER EVENTS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDCATH INCORPORATED
Date Signature and Title
July 7, 1998 /s/ Richard J. Post
---------------------------------------
Richard J. Post
Chief Financial Officer, Secretary and
Treasurer
17
