FORM 10-K/A No. 2
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)
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)
(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
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 April 2, 1998, was
$165,730,775.
As of April 2, 1998, there were 11,670,401 shares of the Registrant's
Common Stock outstanding.
Documents Incorporated by Reference
NONE
<PAGE>
MedCath Incorporated
Index to Form 10-K/A No. 2
For the Year Ended September 30, 1997
Medcath Incorporated (the Company) hereby amends and restates the following
Items of the Annual Report on Form 10K for the fiscal year ending September 30,
1997, to reflect the Company's adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
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<CAPTION>
Page
Part II
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Item 6 - Selected Financial Data 3
Item 7 - Management's Discussion and Analysis of Financial Condition 4
and Results of Operations
Item 8 - Financial Statements and Supplementary Data 14
Part III
Item 14 - Exhibits, Financial Statement Schedules and Reports on
Form 8-K 36
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<PAGE>
MEDCATH INCORPORATED
SELECTED CONSOLIDATED FINANCIAL DATA
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ITEM 6. SELECTED 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.
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<CAPTION>
INCOME STATEMENT DATA YEAR ENDED SEPTEMBER 30,
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(Dollars in thousands, except per share data) 1993 1994 1995 (2) 1996 1997
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<S> <C> <C> <C> <C> <C>
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
Provision for doubtful accounts - - - 735 2,083
Marketing, general and administrative expense 2,601 3,492 4,438 5,408 7,037
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----------- ------------- ------------- -------------- --------------
EBITDA (1) 5,921 9,161 12,082 16,546 28,681
Depreciation and amortization expense 2,179 2,767 3,633 6,649 12,855
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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 -
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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)
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Income before extraordinary item 1,302 2,465 4,251 5,202 6,954
Extraordinary loss - - (228) - (230)
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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)
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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)
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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
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BALANCE SHEET AND OTHER CASH FLOW DATA SEPTEMBER 30,
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(Dollars in thousands) 1993 1994 1995 1996 1997
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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
Net cash provided by operating activities 4,237 6,061 7,963 7,115 14,992
</TABLE>
(1) 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.
(2) 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.
(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.
<PAGE>
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.
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
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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.
3
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MedCath Incorporated
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
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>
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Year Ended September 30,
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1995 1996 1997
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<S> <C> <C> <C>
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
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Total Operating Expenses 78.9 85.0 85.7
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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.
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"). The total number
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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.
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.
5
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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.
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.
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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.
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
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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.
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
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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.
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.
9
<PAGE>
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.
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
10
<PAGE>
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.
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.
11
<PAGE>
Item 8. Financial Statements and Supplemental 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
present 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.
12
<PAGE>
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.
13
<PAGE>
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.
14
<PAGE>
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.
15
<PAGE>
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.
16
<PAGE>
<PAGE>
MedCath Incorporated
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
are accounted for using the equity method of accounting and other investments
are stated at cost.
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.
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.
17
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
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.
18
<PAGE>
Revenue Recognition
The Company's Mobile Cath Labs, Fixed-Site Facilities and Managed Practices
operate under various fixed-price and cost-reimbursement-plus-fee contracts.
Revenue on fixed-price contracts is recognized as services are rendered based on
contracted rates. Revenue on cost-reimbursement-plus-fee contracts is recognized
on the basis of costs incurred during the period plus the fee earned. The
Company's fees for the services provided to Managed Practices include a
percentage of the net revenue or operating income of the practice. 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 Statement 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.
19
<PAGE>
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.
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.
20
<PAGE>
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):
Six Months Ended March 31, 1995
--------------------------------
(unaudited)
Net revenue:
MedCath $ 16,076
HealthTech 3,980
--------------------------------
Combined 20,056
================================
Net income:
MedCath $ 1,494
HealthTech 555
Pro forma tax provisions (211)
--------------------------------
Combined 1,838
================================
Combined per weighted average
share data assuming dilution:
Income before extraordinary item $ 0.26
================================
Net Income $ 0.23
================================
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):
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
========================================
Substantially all of the Company's property, plant and equipment is pledged as
collateral for various long-term obligations as described in Note 6.
21
<PAGE>
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).
5. Supplementary Information
Accounts Receivable
Accounts receivable, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1996 1997
---------------------------------------
<S> <C> <C>
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):
<CAPTION>
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
=======================================
</TABLE>
22
<PAGE>
6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1996 1997
---------------------------------------
<S> <C> <C>
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>
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
is 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.
23
<PAGE>
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.
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.
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):
Fiscal Year
1998 $ 5,503
1999 10,162
2000 17,272
2001 6,117
2002 4,540
2003 and thereafter 58,612
-----------------
$ 102,206
=================
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.
24
<PAGE>
Total future minimum payments under leases with initial terms of one year or
more as of September 30, 1997 are as follows (in thousands):
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
============
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.
Total future minimum revenue to be earned under these agreements as of September
30, 1997 is as follows (in thousands):
Fiscal Year
1998 $ 6,126
1999 1,994
2000 774
2001 7
---------------
$ 8,901
===============
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.
25
<PAGE>
8. Income Taxes
The components of the provision for income taxes were as follows (in thousands):
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
====================================
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)
==========================
The differences between the U.S. federal statutory tax rate and the Company's
effective rate were as follows:
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%
==============================
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.
26
<PAGE>
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.
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.
27
<PAGE>
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):
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
Because Statement 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:
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
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.
28
<PAGE>
Option plan activity for the years ended September 30, 1995, 1996 and 1997 is
set forth below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price Price Per Share
----------------------------------------------------
<S> <C> <C> <C>
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>
Options Outstanding Options Exercisable
-------------------------------- ----------------------------
Remaining Weighted Average Weighted Average
Contractual Life Number Exercise Price Number Exercise Price
- --------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
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.
29
<PAGE>
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.
30
<PAGE>
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial results were as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------ ----------------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
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 share .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 .11
========================================================================================
Net income per share assuming
dilution .15 .18 .13 .12
========================================================================================
</TABLE>
31
<PAGE>
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):
Year Ended September 30
------------------------------------
1995 1996 1997
------------------------------------
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 $ 6,611 $ 3,334
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
========= ========= =========
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.
16. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended September 30
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S><C>
Numerator:
Net income before extraordinary item (A) $ 4,251 $ 5,202 $ 6,954
Interest Expense - Convertible
Subordinated Debt - - 112
======================================================
Adjusted net 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 before
extraordinary item (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
Net 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
Net income before extraordinary (B)/(F) $ 0.51 $ 0.51 $ 0.60
item
======================================================
Net income (D)/(F) $ 0.48 $ 0.51 $ 0.58
======================================================
</TABLE>
32
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
Medcath Incorporated (the Company) hereby amends the following Exhibits to the
Annual Report on Form 10K for the fiscal year ending September 30, 1997 to
reflect the Company's adoption of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." All other Exhibits as previously filed remain
unchanged.
<TABLE>
Exhibit
<S> <C>
11 Statement recomputation of per share earnings Not applicable
13.1 Such portion of the 1997 Annual Report to Shareholders Not Applicable
that is being incorporated by reference to the Form 10K.
23.1 Consent of Independent Auditors Included herewith
27 Financial Data Schedule (included in the Edgar filing only) Included herewith
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to its
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
MEDCATH INCORPORATED
By /s/ Richard J. Post
----------------------
Richard J. Post, Chief Financial
Officer, Secretary and Treasurer
37
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Description
23.1 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule (included in the EDGAR filing only.)
38
<PAGE>
<PAGE>
Exhibit 23.1
Consent of Ernst and 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 of
Medcath Incorporated for the year ended September 30, 1997, as amended by this
Form 10K/A.
/s/ Ernst and Young, LLP
Charlotte, North Carolina
April 9, 1998
39
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1997
and the Condensed Consolidated Statement of Income for the twelve months ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000931782
<NAME> MedCath Incorporated
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 17,607
<SECURITIES> 25,344
<RECEIVABLES> 23,849
<ALLOWANCES> (1,489)
<INVENTORY> 3,168
<CURRENT-ASSETS> 69,147
<PP&E> 159,127
<DEPRECIATION> (19,942)
<TOTAL-ASSETS> 259,008
<CURRENT-LIABILITIES> 21,649
<BONDS> 98,863
0
0
<COMMON> 112
<OTHER-SE> 127,025
<TOTAL-LIABILITY-AND-EQUITY> 259,008
<SALES> 0
<TOTAL-REVENUES> 110,910
<CGS> 0
<TOTAL-COSTS> 73,109
<OTHER-EXPENSES> 19,892
<LOSS-PROVISION> 2,083
<INTEREST-EXPENSE> 5,236
<INCOME-PRETAX> 11,269
<INCOME-TAX> 4,315
<INCOME-CONTINUING> 6,954
<DISCONTINUED> 0
<EXTRAORDINARY> (230)
<CHANGES> 0
<NET-INCOME> 6,724
<EPS-PRIMARY> 0.60<F1>
<EPS-DILUTED> 0.58
<FN>
<F1>
EPS-BASIC
</FN>
</TABLE>
