exv99w2
Exhibit 99.2
INDEX TO FINANCIAL STATEMENTS
MEDCATH CORPORATION AND SUBSIDIARIES
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Page |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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2 |
CONSOLIDATED FINANCIAL STATEMENTS: |
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Consolidated Balance Sheets as of September 30, 2010 and 2009 |
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3 |
Consolidated Statements of Operations for the Years Ended September 30, 2010, 2009 and 2008 |
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4 |
Consolidated Statements of Stockholders Equity for the Years Ended September 30, 2010, 2009 and 2008 |
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5 |
Consolidated Statements of Cash Flows for the Years Ended September 30, 2010, 2009 and 2008 |
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6 |
Notes to Consolidated Financial Statements |
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7 |
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MedCath Corporation
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of MedCath Corporation and
subsidiaries (the Company) as of September 30, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the three years in the
period ended September 30, 2010. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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, such consolidated financial statements present fairly, in all material respects,
the financial position of the Company at September 30, 2010 and 2009, and the results of its
operations and its cash flows for each of the three years in the period ended September 30, 2010,
in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in
which it accounts for non-controlling interests effective October 1, 2009.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
December 14, 2010 (May 27, 2011 as to Notes 1 and 3)
2
MEDCATH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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September 30, |
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2010 |
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2009 |
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Current assets: |
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Cash and cash equivalents |
|
$ |
33,141 |
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$ |
27,412 |
|
Accounts receivable, net (See Note 6) |
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|
43,811 |
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|
42,548 |
|
Income tax receivable |
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|
6,188 |
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|
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Medical supplies |
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|
10,550 |
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|
9,505 |
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Deferred income tax assets |
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|
13,247 |
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|
12,081 |
|
Prepaid expenses and other current assets |
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|
13,453 |
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|
12,691 |
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Current assets of discontinued operations |
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|
47,920 |
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|
72,628 |
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|
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Total current assets |
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|
168,310 |
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|
176,865 |
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Property and equipment, net (See Note 7) |
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|
182,222 |
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|
258,637 |
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Other assets |
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24,716 |
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|
24,614 |
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Non-current assets of discontinued operations |
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119,290 |
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130,332 |
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Total assets |
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$ |
494,538 |
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$ |
590,448 |
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Current liabilities: |
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Accounts payable |
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$ |
15,716 |
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$ |
20,964 |
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Income tax payable |
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|
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|
139 |
|
Accrued compensation and benefits |
|
|
16,418 |
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|
12,608 |
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Other accrued liabilities |
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16,663 |
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|
20,142 |
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Current portion of long-term debt and obligations
under capital leases |
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16,672 |
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|
15,021 |
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Current liabilities of discontinued operations |
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35,044 |
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|
47,757 |
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Total current liabilities |
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100,513 |
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116,631 |
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Long-term debt |
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52,500 |
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66,563 |
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Obligations under capital leases |
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6,500 |
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4,255 |
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Deferred income tax liabilities |
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13,874 |
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Other long-term obligations |
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5,053 |
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8,365 |
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Long-term liabilities of discontinued operations |
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35,968 |
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36,230 |
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Total liabilities |
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200,534 |
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245,918 |
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Commitments and contingencies (See Note 12) |
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Redeemable noncontrolling interest (See Note 2) |
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11,534 |
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7,448 |
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Stockholders equity: |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized;
none issued |
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Common stock, $0.01 par value, 50,000,000 shares authorized; |
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22,423,666 issued and 20,469,305 outstanding at September 30, 2010 |
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21,595,880 issued and 20,150,556 outstanding at September 30, 2009 |
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216 |
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|
216 |
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Paid-in capital |
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457,725 |
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455,259 |
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Accumulated deficit |
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(139,791 |
) |
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(91,420 |
) |
Accumulated other comprehensive loss |
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(444 |
) |
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(360 |
) |
Treasury stock, at cost; |
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1,954,361 shares at September 30, 2010 |
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1,445,324 shares at September 30, 2009 |
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(44,797 |
) |
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(44,797 |
) |
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Total MedCath Corporation stockholders equity |
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272,909 |
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318,898 |
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Noncontrolling interest |
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9,561 |
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18,184 |
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Total equity |
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282,470 |
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337,082 |
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Total liabilities and equity |
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$ |
494,538 |
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$ |
590,448 |
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See notes to consolidated financial statements.
3
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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Year Ended September 30, |
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2010 |
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2009 |
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2008 |
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Net revenue |
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$ |
376,926 |
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$ |
343,849 |
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$ |
337,769 |
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Operating expenses: |
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Personnel expense |
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128,663 |
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114,893 |
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112,236 |
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Medical supplies expense |
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91,931 |
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84,366 |
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81,632 |
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Bad debt expense |
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40,620 |
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33,177 |
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24,515 |
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Other operating expenses |
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91,635 |
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77,000 |
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72,104 |
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Pre-opening expenses |
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|
866 |
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3,563 |
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|
786 |
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Depreciation |
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|
23,675 |
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|
19,299 |
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|
17,896 |
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Amortization |
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|
32 |
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|
891 |
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32 |
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Impairment of long lived assets and goodwill |
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66,822 |
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42,000 |
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(Gain) loss on disposal of property, equipment
and other assets |
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(36 |
) |
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|
93 |
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|
82 |
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Total operating expenses |
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444,208 |
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375,282 |
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309,283 |
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(Loss) income from operations |
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(67,282 |
) |
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(31,433 |
) |
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|
28,486 |
|
Other income (expenses): |
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Interest expense |
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|
(4,278 |
) |
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|
(3,184 |
) |
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(10,464 |
) |
Loss on early extinguishment of debt |
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(6,702 |
) |
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Interest and other income |
|
|
82 |
|
|
|
214 |
|
|
|
1,904 |
|
Loss on note receiveable |
|
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(1,507 |
) |
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Equity in net earnings of unconsolidated affiliates |
|
|
7,267 |
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|
|
9,057 |
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|
7,891 |
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|
|
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|
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Total other income (expense), net |
|
|
1,564 |
|
|
|
(615 |
) |
|
|
(669 |
) |
|
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|
|
|
|
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(Loss) income from continuing operations before income taxes |
|
|
(65,718 |
) |
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(32,048 |
) |
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|
27,817 |
|
Income tax (benefit) expense |
|
|
(26,179 |
) |
|
|
(169 |
) |
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|
6,636 |
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|
|
|
|
|
|
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(Loss) income from continuing operations |
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(39,539 |
) |
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|
(31,879 |
) |
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|
21,181 |
|
Income (loss) from discontinued operations, net of taxes |
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|
3,557 |
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(876 |
) |
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|
21,667 |
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|
|
|
|
|
|
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Net (loss) income |
|
|
(35,982 |
) |
|
|
(32,755 |
) |
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|
42,848 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(12,389 |
) |
|
|
(17,527 |
) |
|
|
(21,858 |
) |
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|
|
|
|
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|
Net (loss) income attributable to MedCath Corporation |
|
$ |
(48,371 |
) |
|
$ |
(50,282 |
) |
|
$ |
20,990 |
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Amounts attributable to MedCath Corporation common stockholders: |
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(Loss) income from continuing operations, net of taxes |
|
$ |
(50,485 |
) |
|
$ |
(41,252 |
) |
|
|
7,982 |
|
Income (loss) from discontinued operations, net of taxes |
|
|
2,114 |
|
|
|
(9,030 |
) |
|
|
13,008 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(48,371 |
) |
|
$ |
(50,282 |
) |
|
$ |
20,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(Loss) earnings per share, basic |
|
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|
|
|
|
|
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|
(Loss) income from continuing operations attributable to MedCath |
|
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|
|
|
|
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|
|
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Corporation common stockholders |
|
$ |
(2.55 |
) |
|
$ |
(2.09 |
) |
|
$ |
0.40 |
|
Income (loss) from discontinued operations attributable to MedCath |
|
|
|
|
|
|
|
|
|
|
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Corporation common stockholders |
|
|
0.11 |
|
|
|
(0.46 |
) |
|
|
0.65 |
|
|
|
|
|
|
|
|
|
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|
(Loss) earnings per share, basic |
|
$ |
(2.44 |
) |
|
$ |
(2.55 |
) |
|
$ |
1.05 |
|
|
|
|
|
|
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|
|
|
|
|
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|
|
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|
|
|
|
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|
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|
(Loss) earnings per share, diluted |
|
|
|
|
|
|
|
|
|
|
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|
(Loss) income from continuing operations attributable to MedCath |
|
|
|
|
|
|
|
|
|
|
|
|
Corporation common stockholders |
|
$ |
(2.55 |
) |
|
$ |
(2.09 |
) |
|
$ |
0.40 |
|
Income from discontinued operations attributable to MedCath |
|
|
|
|
|
|
|
|
|
|
|
|
Corporation common stockholders |
|
|
0.11 |
|
|
|
(0.46 |
) |
|
|
0.64 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted |
|
$ |
(2.44 |
) |
|
$ |
(2.55 |
) |
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic |
|
|
19,842 |
|
|
|
19,684 |
|
|
|
19,996 |
|
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
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|
Weighted average number of shares, diluted |
|
|
19,842 |
|
|
|
19,684 |
|
|
|
20,069 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
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|
|
|
|
|
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|
|
|
|
|
|
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|
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Redeemable |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Interest |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
Noncontrolling |
|
|
Equity |
|
|
(Temporary |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Interest |
|
|
(Permanent) |
|
|
Equity) |
|
Balance, September 30, 2007 |
|
|
21,271 |
|
|
$ |
213 |
|
|
$ |
447,688 |
|
|
$ |
(61,821 |
) |
|
$ |
(62 |
) |
|
|
69 |
|
|
$ |
(394 |
) |
|
$ |
21,141 |
|
|
$ |
406,765 |
|
|
$ |
8,596 |
|
Cumulative impact of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307 |
) |
|
|
|
|
Exercise of stock options, including
income tax benefit |
|
|
282 |
|
|
|
3 |
|
|
|
4,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,744 |
|
|
|
|
|
Share buyback |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,885 |
|
|
|
(44,403 |
) |
|
|
|
|
|
|
(44,403 |
) |
|
|
|
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
4,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,978 |
|
|
|
|
|
Tax impact of cancellation of stock
options |
|
|
|
|
|
|
|
|
|
|
(1,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,913 |
) |
|
|
|
|
Acquisitions and other transactions
impacting noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344 |
|
|
|
344 |
|
|
|
(115 |
) |
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,152 |
) |
|
|
(23,152 |
) |
|
|
(4,005 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,290 |
|
|
|
38,280 |
|
|
|
4,568 |
|
Change in fair value of interest rate
swaps, net of income tax benefit (*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
|
21,553 |
|
|
|
216 |
|
|
|
455,494 |
|
|
|
(41,138 |
) |
|
|
(179 |
) |
|
|
1,954 |
|
|
|
(44,797 |
) |
|
|
15,623 |
|
|
|
385,219 |
|
|
|
9,044 |
|
Stock awards, including cancelations and
income tax effects |
|
|
43 |
|
|
|
|
|
|
|
(1,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,826 |
) |
|
|
|
|
Restricted stock awards, inlcuding
cancelations |
|
|
|
|
|
|
|
|
|
|
1,591 |
|
|
|
|
|
|
|
|
|
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
|
1,591 |
|
|
|
|
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,436 |
) |
|
|
(11,436 |
) |
|
|
(4,895 |
) |
Acquisitions and other transactions
impacting noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118 |
) |
|
|
(118 |
) |
|
|
(102 |
) |
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,115 |
|
|
|
(36,167 |
) |
|
|
3,401 |
|
Change in fair value of interest rate
swaps, net of income tax benefit (*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
|
21,596 |
|
|
|
216 |
|
|
|
455,259 |
|
|
|
(91,420 |
) |
|
|
(360 |
) |
|
|
1,445 |
|
|
|
(44,797 |
) |
|
|
18,184 |
|
|
|
337,082 |
|
|
|
7,448 |
|
Stock awards, including cancelations and
income tax benefit |
|
|
363 |
|
|
|
|
|
|
|
2,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,646 |
|
|
|
|
|
Tax withholdings for vested restricted
stock awards |
|
|
(44 |
) |
|
|
|
|
|
|
(293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293 |
) |
|
|
|
|
Transfer of restricted shares from
treasury stock |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,956 |
) |
|
|
(14,956 |
) |
|
|
(3,560 |
) |
Acquisitions and other transactions
impacting noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
72 |
|
|
|
(77 |
) |
Sale of equity interest |
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
140 |
|
|
|
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,234 |
|
|
|
(42,137 |
) |
|
|
7,723 |
|
Change in fair value of interest rate
swap, net of income tax benefit (*) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,221 |
) |
|
|
7,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
22,424 |
|
|
$ |
216 |
|
|
$ |
457,725 |
|
|
$ |
(139,791 |
) |
|
$ |
(444 |
) |
|
|
1,954 |
|
|
$ |
(44,797 |
) |
|
$ |
9,561 |
|
|
$ |
282,470 |
|
|
$ |
11,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Tax benefits were $0.1 million for each of the years ended September 30, 2010, 2009
and 2008. |
See notes to consolidated financial statements.
5
MEDCATH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net (loss) income |
|
$ |
(35,982 |
) |
|
$ |
(32,755 |
) |
|
$ |
42,848 |
|
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations, net of taxes |
|
|
(3,557 |
) |
|
|
876 |
|
|
|
(21,667 |
) |
Bad debt expense |
|
|
40,620 |
|
|
|
33,177 |
|
|
|
24,515 |
|
Depreciation |
|
|
23,675 |
|
|
|
19,299 |
|
|
|
17,896 |
|
Amortization |
|
|
32 |
|
|
|
891 |
|
|
|
32 |
|
Excess income tax benefit on stock awards and options |
|
|
|
|
|
|
|
|
|
|
(608 |
) |
Loss on disposal of property, equipment and other assets |
|
|
(36 |
) |
|
|
93 |
|
|
|
82 |
|
Share-based compensation expense |
|
|
3,148 |
|
|
|
2,390 |
|
|
|
4,978 |
|
Loss on early extinguishment of debt |
|
|
|
|
|
|
6,702 |
|
|
|
|
|
Amortization of loan acquisition costs |
|
|
994 |
|
|
|
937 |
|
|
|
828 |
|
Impairment of long-lived assets and goodwill |
|
|
66,822 |
|
|
|
42,000 |
|
|
|
|
|
Equity in earnings of unconsolidated affiliates, net of distributions received |
|
|
4,089 |
|
|
|
928 |
|
|
|
(224 |
) |
Deferred income taxes |
|
|
(22,982 |
) |
|
|
(3,322 |
) |
|
|
3,032 |
|
Change in assets and liabilities that relate to operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(41,882 |
) |
|
|
(27,918 |
) |
|
|
(20,081 |
) |
Medical supplies |
|
|
(1,045 |
) |
|
|
(2,891 |
) |
|
|
(328 |
) |
Prepaid and other assets |
|
|
(6,887 |
) |
|
|
(342 |
) |
|
|
1,071 |
|
Accounts payable and accrued liabilities |
|
|
879 |
|
|
|
(1,812 |
) |
|
|
(19,891 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
27,888 |
|
|
|
38,253 |
|
|
|
32,483 |
|
Net cash provided by operating activities of discontinued operations |
|
|
15,406 |
|
|
|
25,380 |
|
|
|
19,525 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
43,294 |
|
|
|
63,633 |
|
|
|
52,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(15,821 |
) |
|
|
(84,695 |
) |
|
|
(50,052 |
) |
Proceeds from sale of property and equipment |
|
|
602 |
|
|
|
1,741 |
|
|
|
968 |
|
Changes in cash restricted for investment |
|
|
|
|
|
|
3,154 |
|
|
|
(3,154 |
) |
Investments in affiliates |
|
|
|
|
|
|
|
|
|
|
(9,530 |
) |
Purchase of equity interest |
|
|
|
|
|
|
|
|
|
|
(3,694 |
) |
Sale of interest in equity method investment |
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations |
|
|
(14,383 |
) |
|
|
(79,800 |
) |
|
|
(65,462 |
) |
Net cash (used in) provided by investing activities of discontinued operations |
|
|
(2,573 |
) |
|
|
16,010 |
|
|
|
59,657 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(16,956 |
) |
|
|
(63,790 |
) |
|
|
(5,805 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
83,479 |
|
|
|
|
|
Repayments of long-term debt |
|
|
(13,438 |
) |
|
|
(113,239 |
) |
|
|
(34 |
) |
Repayments of obligations under capital leases |
|
|
(1,951 |
) |
|
|
(933 |
) |
|
|
(945 |
) |
Distributions to noncontrolling interest |
|
|
(10,285 |
) |
|
|
(10,294 |
) |
|
|
(16,366 |
) |
Investment by noncontrolling interest |
|
|
109 |
|
|
|
207 |
|
|
|
|
|
Sale of equity interest in subsidiary |
|
|
140 |
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
|
|
|
|
77 |
|
|
|
4,317 |
|
Purchase of treasury shares |
|
|
|
|
|
|
|
|
|
|
(44,403 |
) |
Tax withholding of vested restricted stock awards |
|
|
(293 |
) |
|
|
|
|
|
|
|
|
Excess income tax benefit on stock awards and options |
|
|
|
|
|
|
|
|
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities of continuing operations |
|
|
(25,718 |
) |
|
|
(40,703 |
) |
|
|
(56,823 |
) |
Net cash used in financing activities of discontinued operations |
|
|
(15,291 |
) |
|
|
(9,507 |
) |
|
|
(21,205 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(41,009 |
) |
|
|
(50,210 |
) |
|
|
(78,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(14,671 |
) |
|
|
(50,367 |
) |
|
|
(31,825 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
61,701 |
|
|
|
112,068 |
|
|
|
143,893 |
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
47,030 |
|
|
$ |
61,701 |
|
|
$ |
112,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents of continuing operations |
|
|
33,141 |
|
|
|
27,412 |
|
|
|
91,005 |
|
Cash and cash equivalents of discontinued operations |
|
|
13,889 |
|
|
|
34,289 |
|
|
|
21,063 |
|
See notes to consolidated financial statements.
6
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except per share amounts)
1. Business and Organization
MedCath Corporation (the Company) primarily focuses on providing high acuity services, including
the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in
partnership with physicians. As of September 30, 2010, the Company had ownership interests in and
operated ten hospitals, including eight in which the Company owned a majority interest.
As noted below under Our Strategic Options Review", subsequent to year end the Company sold three
of its majority owned hospitals that were classified as discontinued operations as of September 30,
2010 and its equity interests in one of its minority owned hospitals. As a result, the Company
currently owns interests in six hospitals. Each of the Companys majority-owned hospitals is a
freestanding, licensed general acute care hospital that provides a wide range of health services
with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room
staffed by emergency department physicians. During May 2009 the Company completed a 79 licensed bed
expansion at Louisiana Medical Center and Heart Hospital (LMCHH) and built space for an
additional 40 beds at that hospital. During October 2009, the Company opened a new acute care
hospital, Hualapai Mountain Medical Center (HMMC), in Kingman, Arizona. This hospital is designed
to accommodate a total of 106 licensed beds, with an initial opening of 70 of its licensed beds.
The hospitals in which the Company had an ownership interest as of September 30, 2010 had a total
of 825 licensed beds, 237 of which are related to Arizona Heart Hospital (AzHH), Heart Hospital
of Austin (HHA) and TexSan Heart Hospital (TexSan) whose assets, liabilities, and operations
are included within discontinued operations. AzHH, HHA and TexSan were sold on October 1, 2010,
November 1, 2010 and December 31, 2010, respectively. The Companys six hospitals that currently
comprise continuing operations have 533 licensed beds and are located in six states: Arizona,
Arkansas, California, Louisiana, New Mexico, and Texas.
In addition to our hospitals, we currently own and/or manage eight cardiac diagnostic and
therapeutic facilities. Seven of these facilities are located at hospitals operated by other
parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The
remaining facility is not located at a hospital and offers only diagnostic procedures. We refer to
our diagnostics division as MedCath Partners. For financial data and other information of this
and other segments of our business see Note 20.
The Company accounts for all but two of its owned and operated hospitals as consolidated
subsidiaries. The Company owns a noncontrolling interest in the Avera Heart Hospital of South
Dakota (which was sold on October 1, 2010) and Harlingen Medical Center as of September 30, 2010.
Therefore, the Company is unable to consolidate these hospitals results of operations and
financial position, but rather is required to account for its noncontrolling interests in these
hospitals as equity investments.
During fiscal 2010 and early fiscal 2011, the Company entered into definitive agreements or
sold its interests in AzHH, HHA, TexSan and certain assets of the MedCath Partners Division.
During fiscal 2009 the Company sold its equity interest in Cape Cod Cardiology Services, LLC (Cape
Cod) and the net assets of Sun City Cardiac Center Associates (Sun City). During fiscal 2008,
the Company sold its equity interest in Heart Hospital of Lafayette and certain assets of Dayton
Heart Hospital. The results of operations of these entities are reported as discontinued
operations for all periods presented. The Company uses judgment in determining whether an entity
will be reported as continuing or discontinued operations under the provisions of accounting
principles generally accepted in the United States (GAAP). Such judgments include whether an
entity will be sold, the period required to complete the disposition and the likelihood of changes
to a plan for sale. If in future periods the Company determines that an entity should be either
reclassified from continuing operations to discontinued operations or from discontinued operations
to continuing operations, previously reported consolidated statements of income are reclassified in
order to reflect the current classification. See Note 3.
Our Strategic Options Review Process
On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic
Options Committee to consider the sale either of its equity or the sale of its individual hospitals
and other assets. The Company retained Navigant Capital Advisors as its financial advisor to assist
in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, the
Company has completed several transactions, including:
|
|
The disposition of Arizona Heart Hospital (Phoenix, Arizona) in which the Company sold
the majority of the hospitals assets to Vanguard Health Systems for $32.0 million, plus
retained working capital. The transaction was completed effective October 1, 2010. |
|
|
|
The disposition of the Companys wholly owned subsidiary that held 33.3% ownership of Avera
Heart Hospital of South Dakota located in Sioux Falls, SD to Avera McKennan for $20.0 million,
plus a percentage of the hospitals available cash. The transaction was completed October 1,
2010. |
|
|
|
The disposition of Heart Hospital of Austin (Texas) in which the Company and the physician
owners sold substantially all of the hospitals assets to St. Davids Healthcare Partnership
L.P. for approximately $83.8 million, plus retained working capital. The transaction was
completed effective November 1, 2010. |
7
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
The disposition of the Companys approximate 27.0% ownership interest in Southwest
Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint ventures physician partners for
$7.0 million. The transaction was completed effective November 1, 2010. |
In addition, the Company announced on November 8, 2010, that it, along with physician investors,
had entered into a definitive agreement to sell substantially all the assets of TexSan Heart
Hospital (San Antonio, Texas) to Methodist Healthcare System of San Antonio for $76.25 million,
plus retained working capital. The transaction, which is subject to regulatory approval and other
customary closing conditions, is anticipated to close during the second quarter of fiscal 2011,
which ends March 31, 2011. This facility does not qualify for discontinued operations treatment at
September 30, 2010.
2. Summary of Significant Accounting Policies and Estimates
Changes in Basis of Presentation Effective October 1, 2009, the Company adopted a new accounting
standard which establishes accounting and reporting standards pertaining to ownership interests in
subsidiaries held by parties other than the parent, the amount of net income attributable to the
parent and to the noncontrolling interests, changes in a parents ownership interest and the
valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated.
This new accounting standard also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling owners.
This new accounting standard generally requires the Company to clearly identify and present
ownership interests in subsidiaries held by parties other than the Company in the consolidated
financial statements within the equity section but separate from the Companys equity. However, in
instances in which certain redemption features that are not solely within the control of the issuer
are present, classification of noncontrolling interests outside of permanent equity is required. It
also requires the amounts of consolidated net income attributable to the Company and to the
noncontrolling interests to be clearly identified and presented on the face of the consolidated
statements of operations; changes in ownership interests to be accounted for as equity
transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary
to be measured at fair value. The implementation of this accounting standard results in
the cash flow impact of certain transactions with noncontrolling interests being classified within
financing activities. Such treatment is consistent with the view that under this new accounting
standard, transactions between the Company and noncontrolling interests are considered to be equity
transactions. The adoption of this new accounting standard has been applied retrospectively for all
periods presented.
Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated,
under the terms of certain of its investees operating agreements, to purchase some or all of the
noncontrolling interests related to certain of the Companys subsidiaries. While the Company
believes that the likelihood of a change in current law that would trigger such purchases was
remote as of September 30, 2010, the occurrence of such regulatory changes is outside the control
of the Company. As a result, these noncontrolling interests totaling $11,534 and $7,448 as of
September 30, 2010 and 2009, respectively, that are subject to this redemption feature are not
included as part of the Companys equity and are carried as redeemable noncontrolling interests in
equity of consolidated subsidiaries on the Companys consolidated balance sheets.
Profits and losses are allocated to the noncontrolling interest in the Companys subsidiaries
in proportion to their ownership percentages and reflected in the aggregate as net income
attributable to noncontrolling interests. The physician partners of the Companys subsidiaries
typically are organized as general partnerships, limited partnerships or limited liability
companies that are not subject to federal income tax. Each physician partner shares in the pre-tax
earnings of the subsidiary in which it is a partner. Accordingly, the income or loss attributable
to noncontrolling interests in each of the Companys subsidiaries are generally determined on a
pre-tax basis. In accordance with this new accounting standard, total net income attributable to
noncontrolling interests are presented after net (loss) income.
Basis of Consolidation The consolidated financial statements include the accounts of the
Company and its subsidiaries that are wholly and majority owned and/or over which it exercises
substantive control, including variable interest entities in which the Company is the primary
beneficiary. All intercompany accounts and transactions have been eliminated in consolidation. The
Company uses the equity method of accounting for entities, including variable interest entities, in
which the Company holds less than a 50% interest, has significant influence but does not have
control, and is not the primary beneficiary.
Use of Estimates The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in
the consolidated financial statements and accompanying notes. There is a reasonable possibility
that actual results may vary significantly from those estimates.
Concentrations of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. Cash
and cash equivalents are maintained with several large financial institutions. Deposits held with
financial institutions typically exceed the insurance provided by the Federal Deposit Insurance
Corporation. The Company has not experienced any losses on its deposits of cash and cash
equivalents.
8
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company grants credit without collateral to its patients, most of whom are insured under
payment arrangements with third party payors, including Medicare, Medicaid and commercial insurance
carriers. The Company has not experienced significant losses related to receivables from individual
patients or groups of patients in any particular industry or geographic area. Accounts receivable
of the Hospital Division represents 95.8% and 88.7% of total accounts receivable for the Company as
of September 30, 2010 and 2009, respectively. The following table summarizes the percentage of net
accounts receivable from all payors for the Hospital Division at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Medicare and Medicaid |
|
|
45 |
% |
|
|
40 |
% |
Commercial |
|
|
43 |
% |
|
|
44 |
% |
Other, including self-pay |
|
|
12 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Cash and Cash Equivalents The Company considers currency on hand, demand deposits, and all
highly liquid investments with an original maturity of three months or less at the date of purchase
to be cash and cash equivalents.
Allowance for Doubtful Accounts Accounts receivable primarily consist of amounts due from
third-party payors and patients in the Companys Hospital Division. The remainder of the Companys
accounts receivable principally consists of amounts due from billings to hospitals for various
cardiovascular care services performed in its MedCath Partners Division. To provide for accounts
receivable that could become uncollectible in the future, the Company establishes an allowance for
doubtful accounts to reduce the carrying value of such receivables to their estimated net
realizable value. The Company estimates this allowance based on such factors as payor
mix, aging and the historical collection experience and write-offs of its respective hospitals and
other business units.
Medical Supplies Medical supplies consist primarily of supplies necessary for diagnostics,
catheterization and surgical procedures and general patient care and are stated at the lower of
first-in, first-out cost or market.
Property and Equipment Property and equipment are recorded at cost and are depreciated
principally on a straight-line basis over the estimated useful lives of the assets, which generally
range from 25 to 40 years for buildings and improvements, 15 to 25 years for land improvements, and
from 3 to 10 years for equipment, furniture and software. Repairs and maintenance costs are charged
to operating expense while betterments are capitalized as additions to the related assets.
Retirements, sales, and disposals are recorded by removing the related cost and accumulated
depreciation with any resulting gain or loss reflected in income from operations. Amortization of
property and equipment recorded under capital leases is included in depreciation expense. Interest
expense incurred in connection with the construction of hospitals is capitalized as part of the
cost of construction until the facility is operational, at which time depreciation begins using the
straight-line method over the estimated useful life of the applicable constructed assets. The
Company did not capitalize interest during the year ended September 30, 2010. The Company
capitalized interest of $2.7 million and $1.2 million, respectively, during the years ended
September 30, 2009 and 2008.
Goodwill Goodwill represents acquisition costs in excess of the fair value of net identifiable
tangible and intangible assets of businesses purchased. All of the Companys goodwill was recorded
within the Hospital Division segment, see Note 20. The Company evaluated goodwill annually on
September 30 for impairment, or earlier if indicators of potential impairment exist. The
determination of whether or not goodwill has become impaired involves a significant level of
judgment in the assumptions underlying the approach used to determine the value of the Companys
reporting unit. See Note 4 for additional disclosure related to the Companys annual impairment
evaluation of goodwill.
Other Assets Other assets primarily consist of investments in affiliates (see Note 8), loan
acquisition costs and assets associated with management contracts and physician related revenue
guarantees (see Note 12). Loan acquisition costs (Loan Costs) are costs associated with obtaining
long-term financing. Loan Costs, net of accumulated amortization, were $1.1 million and $2.1
million as of September 30, 2010 and 2009, respectively. Loan Costs are being amortized using the
straight-line method, which approximates the effective interest method, as a component of interest
expense over the life of the related debt. Amortization expense recognized for Loan Costs totaled
$1.0 million, $1.0 million, and $0.9 million for the years ended September 30, 2010, 2009 and 2008,
respectively.
9
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-Lived Assets Long-lived assets, such as property, equipment, and purchased intangible
assets subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. If
circumstances require a long-lived asset be tested for possible impairment, the Company first
compares undiscounted cash flows expected to be generated by an asset to the carrying value of the
asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash
flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value.
Fair value is determined by management through various valuation techniques including, but not
limited to, discounted cash flow models, quoted market comparables and third party indications of
value obtained in conjunction with the Companys evaluation of Strategic Alternatives. The
determination of whether or not long-lived assets have become impaired involves a significant level
of judgment in the assumptions underlying the approach used to determine the estimated future cash
flows expected to result from the use of those assets. Changes in the Companys strategy,
assumptions and/or market conditions could significantly impact these judgments and require
adjustments to recorded amounts of long-lived assets. See Note 4 for the impairment charges
recorded to property and equipment and Note 13 for further discussions as to the Companys
determination of fair value.
Other Long-Term Obligations Other long-term obligations consist of physician revenue guarantees
and other long term contracts. See Note 12 for further discussion of these physician guarantees.
Market Risk Policy The Companys policy for managing risk related to its exposure to variability
in interest rates, commodity prices, and other relevant market rates and prices includes
consideration of entering into derivative instruments (freestanding derivatives), or contracts or
instruments containing features or terms that behave in a manner similar to derivative instruments
(embedded derivatives) in order to mitigate its risks. In addition, the Company may be required to
hedge some or all of its market risk exposure, especially to interest rates, by creditors who
provide debt funding to the Company. The Company recognizes all derivatives as either assets or
liabilities on the balance sheets and measures those instruments at fair value.
Comprehensive Income (Loss) Comprehensive income or loss is the change in equity of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources.
Revenue Recognition Amounts the Company receives for treatment of patients covered by
governmental programs such as Medicare and Medicaid and other third-party payors such as commercial
insurers, health maintenance organizations and preferred provider organizations are generally less
than established billing rates. Payment arrangements with third-party payors may include
prospectively determined rates per discharge or per visit, a discount from established charges, per
diem payments, reimbursed costs (subject to limits) and/or other similar contractual arrangements.
As a result, net revenue for services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. The Company accounts for the differences between the
estimated realizable rates under the reimbursement program and the standard billing rates as
contractual adjustments.
The majority of the Companys contractual adjustments are system-generated at the time of billing
based on either government fee schedules or fee schedules contained in managed care agreements with
various insurance plans. Portions of the Companys contractual adjustments are performed manually
and these adjustments primarily relate to patients that have insurance plans with whom the
Companys hospitals do not have contracts containing discounted fee schedules, also referred to as
non-contracted payors, and patients that have secondary insurance plans following adjudication by
the primary payor. Estimates of contractual adjustments are made on a payor-specific basis and
based on the best information available regarding the Companys interpretation of the applicable
laws, regulations and contract terms. While subsequent adjustments to the systematic contractual
allowances can arise due to denials, short payments deemed immaterial for continued collection
effort and a variety of other reasons, such amounts have not historically been significant.
The Company continually reviews the contractual estimation process to consider and incorporate
updates to the laws and regulations and any changes in the contractual terms of its programs. Final
settlements under some of these programs are subject to adjustment based on audit by third parties,
which can take several years to determine. From a procedural standpoint, for governmental payors,
primarily Medicare, the Company recognizes estimated settlements in its consolidated financial
statements based on filed cost reports. The Company subsequently adjusts those settlements as new
information is obtained from audits or reviews by the fiscal intermediary and, if the result of the
fiscal intermediary audit or review impacts other unsettled and open cost reports, the Company
recognizes the impact of those adjustments. As such, the Company recognized adjustments that
decreased net revenue by $0.3 million, $3.2 million and $0.3 million for continuing operations in
the years ended September 30, 2010, 2009 and 2008, respectively. The Company recognized adjustments
that decreased net revenue by $2.0 million and $1.3 million for discontinued operations in the
years ended September 30, 2009 and 2008, respectively. The Company recognized immaterial
adjustments to net revenue for discontinued operations for the year ended September 30, 2010.
The Company records charity care deductions as a reduction to gross revenue. Patients that receive
charity care discounts must provide a complete and accurate application, be in need of non-elective
care and meet certain federal poverty guidelines established by the U.S. Department of Health and
Human Services.
10
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A significant portion of the Companys net revenue is derived from federal and state governmental
healthcare programs, including Medicare and Medicaid, which, combined, accounted for 54.7%, 55.2%
and 53.6% of the Companys net revenue during the years ended September 30, 2010, 2009 and 2008,
respectively. Medicare payments for inpatient acute services and certain outpatient services are
generally made pursuant to a prospective kdpayment system. Under this system, hospitals are
paid a prospectively-determined fixed amount for each hospital discharge based on the patients
diagnosis. Specifically, each discharge is assigned to a diagnosis-related group (DRG). Based
upon the patients condition and treatment during the relevant inpatient stay, each DRG is assigned
a fixed payment rate that is prospectively set using national average costs per case for treating a
patient for a particular diagnosis. The DRG rates are adjusted by an update factor each federal
fiscal year, which begins on October 1. The update factor is determined, in part, by the projected
increase in the cost of goods and services that are purchased by hospitals, referred to as the
market basket index. DRG payments do not consider the actual costs incurred by a hospital in
providing a particular inpatient service; however, DRG payments are adjusted by a predetermined
adjustment factor assigned to the geographic area in which the hospital is located.
While hospitals generally do not receive direct payment in addition to a DRG payment, hospitals may
qualify for additional capital-related cost reimbursement and outlier payments from Medicare under
specific circumstances. In addition, some hospitals with high levels of low income patients qualify
for Medicare Disproportionate Share Hospital (DSH) reimbursement as an add on to DRG payments.
Medicare payments for most outpatient services are based on prospective payments using ambulatory
payment classifications (APCs). Other outpatient services, including outpatient clinical
laboratory, are reimbursed through a variety of fee schedules. The Company is reimbursed for DSH
payments and cost-reimbursable items at tentative rates, with final settlement determined after
submission of annual cost reports by the Company and audits thereof by the Medicare fiscal
intermediary.
Medicaid payments for inpatient and outpatient services are based upon methodologies specific to
the state in which hospitals are located and are made at prospectively determined amounts, such as
DRGs; reasonable costs or charges; or fee schedule. Depending upon the state in which hospitals are
located, Medicaid payments may be made at tentative rates with final settlement determined after
submission of annual cost reports by the hospitals and audits or reviews thereof by the states
Medicaid agencies.
The Companys managed diagnostic and therapeutic facilities and mobile cardiac catheterization
laboratories operate under various contracts where management fee revenue is recognized under
fixed-rate and percentage-of-income arrangements as services are rendered. In addition, certain
diagnostic and therapeutic facilities and mobile cardiac catheterization laboratories recognize
additional revenue under cost reimbursement and equipment lease arrangements. Net revenue from the
Companys owned diagnostic facility and mobile cardiac catheterization laboratories is reported at
the estimated net realizable amounts due from patients, third-party payors, and others as services
are rendered, including estimated retroactive adjustments under reimbursement agreements with
third-party payors.
Segment Reporting. Operating segments are components of an enterprise about which separate
financial information is available and evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. Two or more operating segments may be
aggregated into a single reportable segment if the segments have similar economic and overall
industry characteristics, such as customer class, products and service. There is no aggregation
within the Companys reportable segments. The description of the Companys reportable segments,
consistent with how business results are reported internally to management and the disclosure of
segment information is discussed in Note 20.
Advertising Advertising costs are expensed as incurred. During the years ended September 30,
2010, 2009 and 2008, the Company incurred $1.9 million, $2.1 million and $1.7 million of
advertising expenses, respectively.
Pre-opening Expenses Pre-opening expenses consist of operating expenses incurred during the
development of new ventures prior to opening for business. Such costs specifically relate to the
Companys development of the Hualapai Mountain Medical Center in Kingman, Arizona and are expensed
as incurred. The Company incurred $0.9 million, $3.6 million and $0.8 million, respectively, of
pre-opening expenses during the years ended September 30, 2010, 2009 and 2008.
Income Taxes Income taxes are computed on the pretax income based on current tax law. Deferred
income taxes are recognized for the expected future tax consequences or benefits of differences
between the tax bases of assets or liabilities and their carrying amounts in the consolidated
financial statements. A valuation allowance is provided for deferred tax assets if it is more
likely than not that these items will either expire before the Company is able to realize their
benefit or that future deductibility is uncertain.
11
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Members and Partners Share of Hospitals Net Income and Loss Each of the Companys
consolidated hospitals is organized as a limited liability company or limited partnership, with one
of the Companys wholly-owned subsidiaries serving as the manager or general partner and holding
from 53.3% to 89.2% of the ownership interest in the entity. In most cases, physician partners or
members own the remaining ownership interests as members or limited partners. In some instances,
the Company may organize a hospital with a community hospital investing as an additional partner or
member. In those instances, the Company may hold a noncontrolling interest in the hospital with the
community hospital and physician partners owning the remaining interests also as noncontrolling
interest partners. In such instances, the hospital is accounted for under the equity method of
accounting. Profits and losses of hospitals accounted for under either the consolidated or equity
methods are allocated to their owners based on their respective ownership percentages. If the
cumulative losses of a consolidated hospital exceed its initial capitalization and committed
capital obligations of the partners or members, pursuant to the terms of the operating agreement,
the Company will recognize a disproportionate share of the hospitals losses that otherwise would
be allocated to all of its owners on a pro rata basis. In such cases, the Company will recognize a
disproportionate share of the hospitals future profits to the extent the Company has previously
recognized a disproportionate share of the hospitals losses.
Share-Based Compensation Compensation expense for share-based awards made to employees and
directors are recognized based on the estimated fair value of each award over each applicable
awards vesting period. The Company estimates the fair value of share-based payment awards on the
date of grant using, either an option-pricing model for stock options or the closing market value
of the Companys stock for restricted stock and restricted stock units, and expenses the value of
the portion of the award that is ultimately expected to vest over the requisite service period in
the Companys statement of operations.
The Company used the Black-Scholes option pricing model with the range of weighted-average
assumptions used for option grants noted in the following table. The expected life of the stock
options represents the period of time that options granted are expected to be outstanding and the
range given below results from certain groups of employees exhibiting different behavior with
respect to the options granted to them and has been determined based on an annual analysis of
historical and expected exercise and cancellation behavior. The risk-free interest rate is based on
the US Treasury yield curve in effect on the date of the grant. The expected volatility is based on
the historical volatilities of the Companys common stock and the common stock of comparable
publicly traded companies.
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
Expected life |
|
5-8 years |
|
5-8 years |
Risk- free interest rate |
|
|
1.36-3.59 |
% |
|
|
2.34-4.56 |
% |
Expected volatility |
|
|
44-49 |
% |
|
|
33-41 |
% |
Stock options awarded to employees are fully vested at the time of grant, with the condition
that the optionee is prohibited from selling the share of stock acquired upon exercise of the
option for a specified period of time. As a result, total share-based compensation is recorded for
stock options on the option grant date.
During fiscal 2010 and 2009 the Company granted shares of restricted stock and restricted stock
units to employees and directors, respectively. Restricted stock granted to employees, excluding
executives of the Company, vest in equal annual installments over a three year period.
Executives of the Company defined by the Company as vice president or higher, received two
separately equal grants. The first grant of restricted stock vests in equal annual installments
over a three year period, the second grant of restricted stock vests over a three year period based
on established performance conditions. All unvested restricted stock granted to employees becomes
fully vested upon a change in control of the Company as defined in the Companys 2006 Stock Option
and Award Plan. Restricted stock units granted to directors are fully vested at the date of grant
and are paid in the form of common stock upon each applicable directors termination of service on
the board.
Recent Accounting Pronouncements The following is a summary of new accounting pronouncements
that have been adopted or that may apply to the Company.
Recently Adopted Accounting Pronouncements In December 2007, the FASB issued a new accounting
standard that establishes accounting and reporting standards pertaining to ownership interests in
subsidiaries held by parties other than the parent, the amount of net income attributable to the
parent and to the noncontrolling interests, changes in a parents ownership interest, and the
valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated.
This new accounting standard also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling owners. The
Company adopted this new standard on October 1, 2009. Upon adoption, a portion of noncontrolling
interests was reclassified to a separate component of total
equity within our consolidated balance sheets.
12
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In April 2008, the FASB issued a new accounting standard which amends the list of factors an entity
should consider in developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets. The new accounting standard applies to intangible assets that are
acquired individually or with a group of other assets and intangible assets acquired in both
business combinations and asset acquisitions. The Company adopted this new standard on October 1,
2009 with no impact to its consolidated financial statements.
Effective the first quarter of fiscal 2009, the Company adopted a new accounting standard issued by
the FASB that defines fair value, establishes a framework for measuring fair value and enhances
disclosures about fair value measures required under other accounting pronouncements, but does not
change existing guidance as to whether or not an instrument is carried at fair value. In February
2008, the FASB delayed the effective date of this new standard for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company elected to defer implementation of
this standard until October 1, 2009 as it relates to the Companys non-financial assets and
non-financial liabilities that are not permitted or required to be measured at fair value on a
recurring basis. The Company adopted this standard on October 1, 2009 with no impact to its
consolidated financial statements. See Note 13.
Recent Accounting Pronouncements:
In June 2009, the FASB issued a new accounting standard that amends the consolidation guidance that
applies to variable interest entities (VIE). The amendments will significantly affect the overall
consolidation analysis. The provisions of this new accounting standard revise the definition and
consideration of VIEs, primary beneficiary, and triggering events in which a company must
re-evaluate its conclusions as to the consolidation of an entity. This new accounting standard is
effective as of the beginning of the first fiscal year after November 15, 2009, fiscal 2011 for the
Company. The adoption of this standard is not expected to have any impact on our consolidated
financial position or results of operations.
In August 2010, the FASB issued Accounting Standard Updates (ASU) 2010-24, Health Care Entities
(Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, which clarifies
that a health care entity should not net insurance recoveries against a related claim liability.
The guidance provided in this ASU is effective as of the beginning of the first fiscal year
beginning after December 15, 2010, fiscal 2012 for the Company. The Company is evaluating the
potential impacts the adoption of this ASU will have on our consolidated financial statements.
In August 2010, the FASB issued ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity
Care for Disclosure, which requires a company in the healthcare industry to use its direct and
indirect costs of providing charity care as the measurement basis for charity care disclosures.
This ASU also requires additional disclosures of the method used to identify such costs. The
guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010,
fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our
consolidated financial position or results of operations.
3. Discontinued Operations
As required under GAAP, the Company has classified the results of operations of the following
entities within income from discontinued operations, net of taxes and the assets and liabilities of
these entities have been classified within current and non-current assets and current and long-term
liabilities of discontinued operations on the consolidated balance sheets.
During November 2010, the Company entered into an agreement to sell substantially all of the assets
of TexSan for $76.25 million, plus retained working capital. The transaction closed on December 31,
2010 with the Company retaining all accounts receivable and the hospitals remaining liabilities.
The gain of $34.3 million will be recognized in income (loss) from discontinued operations in
fiscal year 2011.
During September 2010, the Company entered into an agreement to sell its subsidiary that provided
consulting and management services tailored primarily to cardiologists and cardiovascular surgeons.
Such subsidiarys operations had historically been included in the Corporate and other division.
Such subsidiary was sold in October 2010 for an immaterial loss.
During July, August and September 2010, the MedCath Partners Division of the Company sold or
entered into agreements to sell certain assets of the Division, which, net of taxes resulted in
immaterial losses. The associated losses from these sales that have closed as of September 30, 2010
have been included in income (loss) from discontinued operations on the consolidated statement of
operations for the year ended September 30, 2010.
13
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During August 2010, the Company entered into a definitive agreement to sell certain of the hospital
assets, plus certain net working capital of AzHH for $32.0 million and the assumption of capital
leases of $0.3 million. The transaction closed on October 1, 2010 with the limited liability
company which owned AzHH retaining all accounts receivable and the hospitals remaining
liabilities. The final purchase price is subject to certain post-closing working capital and other
adjustments. As part of its assessment of long-lived assets in June 2010, the Company recognized an
impairment charge of $5.2 million based on the potential sales value of AzHH. Accordingly, the
Company recognized a nominal gain on the sale in fiscal 2011.
During February 2010, the Company entered into an agreement to sell substantially all of the assets
of HHA for $83.8 million plus retention of working capital to St. Davids Healthcare Partnership,
L.P. The transaction closed on November 1, 2010.
During September 2009, the MedCath Partners Division of the Company sold the assets of Sun City for
$16.9 million, which resulted in a gain of $3.2 million, net of taxes. The associated gain from the
sale has been included in income (loss) from discontinued operations on the consolidated statement
of operations for the year ended September 30, 2009.
During December 2008, the MedCath Partners Division of the Company sold its equity interest in Cape
Cod for $6.9 million, which resulted in a gain of $4.0 million, net of taxes. The associated gain
from the sale has been included in income (loss) from discontinued operations on the consolidated
statement of operations for the year ended September 30, 2009.
During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital
(DHH) to Good Samaritan Hospital for $47.5 million pursuant to a definitive agreement. The total
gain recognized, net of taxes, was $3.4 million and is included in income (loss) from discontinued
operations on the consolidated statement of operations for the year ended September 30, 2008. As
part of the gain resulting from the disposition of DHH, $4.6 million of goodwill was written off.
In accordance with the terms of the sale, DHH and Good Samaritan Hospital entered into an
indemnification agreement for a period of eighteen months from the date of the sale. DHH agreed to
indemnify Good Samaritan Hospital from certain exposures arising subsequent to the date of sale,
including environmental exposure and exposure resulting from the breach of
representations or warranties made in accordance with the sale. The indemnification period expired
in November 2010 without the Company incurring any payments under this agreement.
As of September 30, 2010 and 2009 the Company had reserved $9.8 million and $9.6 million,
respectively, for Medicare outlier payments received by DHH during the year ended September 30,
2004, which are included in current liabilities of discontinued operations in the consolidated
balance sheets.
During fiscal 2007, the Company entered into an agreement to dispose of its interest in the Heart
Hospital of Lafayette (HHLf). The sale of HHLf was completed during the year ended September 30,
2008, resulting in an immaterial loss recorded as part of income (loss) from discontinued
operations for the year ended September 30, 2008.
The results of operations and the assets and liabilities of discontinued operations included in the
consolidated statements of operations and consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net revenue |
|
$ |
235,327 |
|
|
$ |
271,662 |
|
|
$ |
311,839 |
|
Gain (loss) from dispositions, net |
|
|
(151 |
) |
|
|
12,055 |
|
|
|
3,399 |
|
Income before income taxes |
|
|
508 |
|
|
|
6,059 |
|
|
|
25,911 |
|
Income tax (benefit) expense |
|
|
(3,049 |
) |
|
|
6,935 |
|
|
|
4,244 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,557 |
|
|
|
(876 |
) |
|
|
21,667 |
|
Less: Net income attributable to noncontrolling interest |
|
|
(1,443 |
) |
|
|
(8,154 |
) |
|
|
(8,659 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to MedCath Corporation |
|
$ |
2,114 |
|
|
$ |
(9,030 |
) |
|
$ |
13,008 |
|
|
|
|
|
|
|
|
|
|
|
14
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash and cash equivalents |
|
$ |
13,889 |
|
|
$ |
34,289 |
|
Accounts receivable, net |
|
|
23,597 |
|
|
|
28,185 |
|
Other current assets |
|
|
10,434 |
|
|
|
10,154 |
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
$ |
47,920 |
|
|
$ |
72,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
115,670 |
|
|
$ |
127,289 |
|
Other intangible assets, net |
|
|
|
|
|
|
37 |
|
Other assets |
|
|
3,620 |
|
|
|
3,006 |
|
|
|
|
|
|
|
|
Long-term assets of discontinued operations |
|
$ |
119,290 |
|
|
$ |
130,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
25,379 |
|
|
$ |
29,911 |
|
Accrued liabilities |
|
|
9,350 |
|
|
|
11,623 |
|
Current portion of long-term debt
and obligations under capital leases |
|
|
315 |
|
|
|
6,223 |
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
35,044 |
|
|
$ |
47,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and obligations under capital leases |
|
$ |
35,302 |
|
|
$ |
35,700 |
|
Other long-term obligations |
|
|
666 |
|
|
|
530 |
|
|
|
|
|
|
|
|
Long-term liabilities of discontinued operations |
|
$ |
35,968 |
|
|
$ |
36,230 |
|
|
|
|
|
|
|
|
Included in the Companys discontinued liabilities is a Real Estate Investment Trust Loan (the
REIT Loan) aggregating $34.6 million and $35.3 million as of September 30, 2010 and 2009,
respectively. Borrowings under this REIT Loan are collateralized by a pledge of the Companys
interest in the related hospitals property, equipment and certain other assets. The REIT Loan
required monthly, interest-only payments for ten years, at which time the loan was due in full,
maturing January 2016. The interest rate on this loan is 8 1/2%. Upon the disposition of the
Companys interest in the related hospital, the REIT Loan was repaid in full in November 2010.
4. Asset Impairment Charges
2010 Impairment Charges
During the year ended September 30, 2010, as more fully discussed in Note 1, the Companys Board of
Directors was in the process of conducting a review of strategic alternatives for the Company.
Additionally, management noted a decline in operating performance at certain facilities during
2010. The Company performed impairment analyses using undiscounted cash flows at the end of each
respective reporting period in 2010 to determine if the carrying amounts of fixed assets were not
recoverable. As a result of the decline in operating performance as well as changes in the timing
and source of anticipated cash flows for certain facilities the Company determined that the
carrying value of these facilities was not fully recoverable. The Company then compared the fair
value of those assets to their respective carrying values in order to determine the amount of the
impairment. As a result approximately $66.8 million of fixed asset impairment charges were recorded
during the year ended September 30, 2010. The Companys fair value estimates were determined by
management based on discounted cash flow models, market comparables, signed letters of intent to
sell certain facilities, and third party indications of value obtained in conjunction with the
Companys evaluation of strategic alternatives.
The Companys fair value estimates could change by material amounts in subsequent periods. Many
factors and assumptions can impact the estimates, including the hospitals future financial
results, the impact of future decisions relative to the Companys Strategic Alternatives Review,
and changes in health care industry trends and regulations. The impairments do not include the
costs of closing or selling the hospitals or other future operating costs, which could be
substantial. See Note 13 for further discussions as to the Companys determination of fair value.
In addition, the MedCath Partners Division recorded charges to earnings of $0.1 million and $1.8
million for the write-down of the Companys investment in Tri-County Heart New Jersey, LLC and
Southwest Arizona Heart and Vascular Center, LLC, respectively. The MedCath Partners Division
received indicators of value in relation to selling the Companys interests in these businesses,
evaluated the carrying values and determined that there was a loss in value that was other than
temporary. Accordingly, the Company recorded an impairment charge of $1.9 million against the
Companys investments, which has been included in equity in net earnings of unconsolidated
affiliates.
15
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2009 Goodwill Impairment Charge
The first step of the Companys annual impairment test was performed as of September 30, 2009,
initially using a combination of a discounted cash flow, market multiple, and comparable
transaction methods. However, the reconciliation of the fair value of the Hospital Division
reporting unit to the Companys market capitalization at September 30, 2009, resulted in a fair
value that indicated an implied control premium that did not appear reasonable. During the fourth
quarter of fiscal 2009, the Companys stock price underperformed comparable companies as well as
the broader markets, and the Company experienced a decline in its fourth quarter operating results.
As a result of these events, the Company placed more reliance on the discounted cash flow method
and used this method to estimate the fair value which resulted in a fair value that was below the
carrying value of the Hospital Division reporting unit.
The second step of the Companys impairment analysis involved allocating the fair value of the
Hospital Division reporting unit, as derived in the first step discussed above, to the assets and
liabilities of the Hospital Division reporting unit. This process requires significant management
estimates and judgments, and is used to determine the implied fair value of the Hospital Division
reporting units goodwill. The Company incorporated recent appraisals and other information in its
analysis, and concluded the implied fair value of goodwill was zero. As a result the entire balance
of $60.2 million of goodwill (including $18.2 million related to businesses classified as
discontinued operations in 2010) was impaired in the fourth quarter of fiscal 2009.
5. Business Combinations and Hospital Development
Purchase of Additional Interests in Hospitals During September 2008, the Company purchased an
additional 3.7% ownership interest in the TexSan Heart Hospital for $1.2 million. Additionally,
during June 2008 the Company acquired an additional 14.29% ownership interest in the TexSan Heart
Hospital, by converting $9.5 million of intercompany debt to equity. As discussed in Note 4, the
Company wrote-off all its goodwill in the year ended September 30, 2009.
During July 2008, the Company purchased an additional 3.0% interest in the Heart Hospital of New
Mexico for $2.5 million. As discussed in Note 4, the Company wrote-off all its goodwill in the year
ended September 30, 2009.
Change in Ownership Due to Cancellation of Stock Subscription Receivable Upon the formation of
Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements
whereby they paid for their ownership in two installments. At the date of formation, the amount
due from the minority owners was recorded as a stock subscription receivable. During the fourth
quarter of fiscal 2010, several minority owners did not submit the final installment. As a result,
and per the partnership operating agreement, the proportionate ownership was transferred to the
Company and the stock subscription receivable was reduced accordingly. As a result, the Companys
ownership in HMMC increased from 79.00% to 82.49%.
Diagnostic and Therapeutic Facilities Development During April 2008, the Company paid $8.5
million to acquire a 27.4% interest in Southwest Arizona Heart and Vascular LLC a joint venture
with the Heart Lung Vascular Center of Yuma. The joint venture provides cardiac
catheterization lab services to Yuma Regional Medical Center in Arizona.
During February 2008, the Company paid $1.0 million to acquire a 33.33% interest in a joint venture
with Solaris Health Systems LLC and individual physician members to manage two cardiac
catheterization laboratories located in New Jersey.
New Hospital Development In August 2007, the Company announced a venture to construct a new 106
inpatient bed capacity general acute care hospital, Hualapai Mountain Medical Center, which is
located in Kingman, Arizona. The hospital is accounted for as a consolidated subsidiary since the
Company, through its wholly-owned subsidiary, owns 82.49% of the interest in the venture with
physician partners owning the remaining 17.51%. Further, the Company exercises substantive control
over the hospital. Construction of Hualapai Mountain Medical Center began during fiscal year 2007.
The facility was completed and opened during October 2009 with 70 licensed beds, and the capacity
for an additional 36 beds to facilitate future growth.
In May 2007, the Company and its physician partners announced a 119 bed general acute care
expansion of its hospital located in St. Tammany Parish, Louisiana. The expansion was completed
during May 2009, with 79 patient rooms being completed initially and capacity for 40 patient rooms
being available for future growth. To recognize its expanded service capabilities, the hospital,
which opened in February 2003, was renamed the Louisiana Medical Center and Heart Hospital.
16
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Accounts Receivable
Accounts receivable, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Receivables, principally from patients and third-party payors |
|
$ |
103,314 |
|
|
$ |
90,073 |
|
Receivables, principally from billings to hospitals for various
cardiovascular procedures |
|
|
1,027 |
|
|
|
1,494 |
|
Other |
|
|
2,555 |
|
|
|
5,214 |
|
|
|
|
|
|
|
|
|
|
|
106,896 |
|
|
|
96,781 |
|
Less allowance for doubtful accounts |
|
|
(63,085 |
) |
|
|
(54,233 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
43,811 |
|
|
$ |
42,548 |
|
|
|
|
|
|
|
|
Activity for the allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
54,233 |
|
|
$ |
31,346 |
|
Bad debt expense |
|
|
40,620 |
|
|
|
33,177 |
|
Write-offs, net of recoveries |
|
|
(31,768 |
) |
|
|
(10,290 |
) |
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
63,085 |
|
|
$ |
54,233 |
|
|
|
|
|
|
|
|
7. Property and Equipment
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
17,635 |
|
|
$ |
22,375 |
|
Buildings |
|
|
149,897 |
|
|
|
191,002 |
|
Equipment |
|
|
163,746 |
|
|
|
165,437 |
|
Construction in progress |
|
|
25 |
|
|
|
17,272 |
|
|
|
|
|
|
|
|
Total, at cost |
|
|
331,303 |
|
|
|
396,086 |
|
Less accumulated depreciation |
|
|
(149,081 |
) |
|
|
(137,449 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
182,222 |
|
|
$ |
258,637 |
|
|
|
|
|
|
|
|
As further discussed in Note 4, during the year ended September 30, 2010 the Company recorded
impairment charges of $66.8 million for the write down of certain property and equipment.
Substantially all of the Companys property and equipment is either pledged as collateral for
various long-term obligations or assigned to lenders under the Senior Secured Credit Facility as
intercompany collateral liens, see Note 9.
8. Investments in Affiliates
The Companys determination of the appropriate consolidation method to follow with respect to
investments in affiliates is based on the amount of control the Company has and the ownership level
in the underlying entity. Investments in entities that the Company does not control, but over whose
operations the Company has the ability to exercise significant influence (including investments
where the Company has a less than 20% ownership), are accounted for under the equity method. The
Company additionally considers if it is the primary beneficiary of (and therefore should
consolidate) any entity whose operations the Company does not control. At September 30, 2010, all
of the Companys investments in unconsolidated affiliates are accounted for using the equity
method.
17
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Variable Interest Entities
Investments in unconsolidated affiliates accounted for under the equity method (which are included
in Other assets on the consolidated balance sheets) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Avera Heart Hospital of South Dakota |
|
$ |
8,730 |
|
|
$ |
9,143 |
|
Harlingen Medical Center |
|
|
5,839 |
|
|
|
5,621 |
|
HMC Realty, LLC |
|
|
(14,044 |
) |
|
|
(11,909 |
) |
Southwest Arizona Heart and Vascular, LLC |
|
|
7,000 |
|
|
|
8,757 |
|
Other |
|
|
1,465 |
|
|
|
2,443 |
|
|
|
|
|
|
|
|
|
|
$ |
8,990 |
|
|
$ |
14,055 |
|
|
|
|
|
|
|
|
In August 2010, the Company entered into an agreement with Avera McKennan for the sale of its
interest in Avera Heart Hospital of South Dakota whereby Avera McKennan would purchase a MedCath
subsidiary which was the indirect owner of a one-third ownership interest and which held management
rights in Avera Heart Hospital of South Dakota. The transaction closed on October 1, 2010.
As further discussed in Note 22, the Company sold its equity interest in Southwest Arizona Heart
and Vascular Center, LLC on November 1, 2010. Pursuant to such pending sale, the Company recognized
a write down of its investment of $1.8 million to record the Companys investment in such business
at its net realizable value expected from the sale proceeds.
The Companys ownership percentage for each investment accounted for under the equity method is
presented in the table below:
|
|
|
|
|
Investee |
|
Ownership |
|
Avera Heart Hospital of South Dakota (a) |
|
|
33.3 |
% |
Harlingen Medical Center (a) |
|
|
34.8 |
% |
HMC Realty LLC (a) |
|
|
36.1 |
% |
Southwest Arizona Heart and Vascular, LLC (b) |
|
|
27.0 |
% |
All Other: |
|
|
|
|
Blue Ridge Cardiology Services, LLC (b) |
|
|
50.0 |
% |
Austin Development Holding, Inc. (a) |
|
|
50.0 |
% |
Central New Jersey Heart Services, LLC (b) |
|
|
14.8 |
% |
Coastal Carolina Heart, LLC (b) |
|
|
9.2 |
% |
(a) |
|
Included in the Hospital Division |
|
(b) |
|
Included in MedCath Partners Division |
Accumulated deficit includes $9.3 million, $9.3 million, and $10.3 million of undistributed
earnings from unconsolidated affiliates accounted for under the equity method at September 30,
2010, 2009, and 2008, respectively. Distributions received from unconsolidated affiliates accounted
for under the equity method were $11.4 million, $10.0 million and $7.7 million during the years
ended September 30, 2010, 2009 and 2008, respectively.
The following tables represent summarized combined financial information of the Companys
unconsolidated affiliates accounted for under the equity method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net revenue |
|
$ |
219,561 |
|
|
$ |
225,843 |
|
|
$ |
215,707 |
|
Income from operations |
|
$ |
45,142 |
|
|
$ |
47,736 |
|
|
$ |
43,053 |
|
Net income |
|
$ |
36,065 |
|
|
$ |
38,797 |
|
|
$ |
34,004 |
|
18
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Current assets |
|
$ |
58,690 |
|
|
$ |
68,174 |
|
Long-term assets |
|
$ |
144,402 |
|
|
$ |
148,993 |
|
Current liabilities |
|
$ |
23,922 |
|
|
$ |
25,770 |
|
Long-term liabilities |
|
$ |
121,524 |
|
|
$ |
122,629 |
|
9. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Amended Credit Facility |
|
$ |
66,563 |
|
|
$ |
80,000 |
|
Less current portion |
|
|
(14,063 |
) |
|
|
(13,437 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
52,500 |
|
|
$ |
66,563 |
|
|
|
|
|
|
|
|
Senior Secured Credit Facility During November 2008, the Company amended and restated its
then outstanding senior secured credit facility (the Amended Credit Facility). The Amended Credit
Facility provides for a three-year term loan facility in the amount of $75.0 million (the Term
Loan) and a revolving credit facility in the amount of $85.0 million (the Revolver), which
includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit
and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval
from its lenders, the aggregate amount available under the Amended Credit Facility may be increased
by an amount up to $50.0 million. Borrowings under the Amended Credit Facility, excluding
swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus an applicable
margin or the alternate base rate plus an applicable margin. At September 30, 2010 the Term Loan
bore interest at 3.26%. The $66.6 million outstanding under the Amended Credit Facility at
September 30, 2010 related to the Term Loan. No amounts were outstanding under the Revolver as of
September 30, 2010. At September 30, 2009, $75.0 million was outstanding under the Term Loan and
$5.0 million was outstanding under the Revolver.
The Amended Credit Facility continues to be guaranteed jointly and severally by the Company and
certain of the Companys existing and future, direct and indirect, wholly owned subsidiaries and is
secured by a first priority perfected security interest in all of the capital stock or other
ownership interests owned by the Company and subsidiary guarantors in each of their subsidiaries,
and, subject to certain exceptions in the Amended Credit Facility, all other present and future
assets and properties of the Company and the subsidiary guarantors and all intercompany notes.
The Amended Credit Facility requires compliance with certain financial covenants including a
consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test
and a consolidated total leverage ratio test. The Amended Credit Facility also contains customary
restrictions on, among other things, the Company and subsidiaries ability to incur liens; engage
in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and
repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions;
and enter into transactions with affiliates.
The Amended Credit Facility contains events of default, including cross-defaults to certain
indebtedness, change of control events, and other events of default customary for syndicated
commercial credit facilities. Upon the occurrence of an event of default, the Company could be
required to immediately repay all outstanding amounts under the Amended Credit Facility.
The Company is required to make mandatory prepayments of principal in specified amounts upon the
occurrence of certain events identified in the Amended Credit Facility and is permitted to make
voluntary prepayments of principal under the Amended Credit Facility. The Term Loan is subject to
amortization of principal in quarterly installments, which began March 31, 2010. The maturity date
of both the Term Loan and the Revolver is November 10, 2011.
19
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit
Facility (the First Amendment). The Company entered into the First Amendment to provide
additional financial and liquidity flexibility in connection with its previously announced effort
to explore strategic alternatives. The First Amendment contains modifications of certain financial
covenants and other requirements of the Amended Credit Facility, including, but not limited to:
modifications to certain definitions contained in the Amended Credit Facility, including the
definitions of certain financial terms to permit additional add backs (such as an add back for
charges and professional expenses incurred in connection with asset dispositions), subject to
maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics
derived in accordance with such definitions, for certain financial covenant calculations;
increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset
dispositions covenant to permit additional asset dispositions subject to no events of default and
require that any net cash proceeds from an asset disposition or series of dispositions in excess of
$50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan
amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver
or cash collateralize letters of credit to the extent outstanding and permanently reduce the
Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the
amount of such permanent commitment reductions. In addition, any mandatory prepayments of the
Revolver will also reduce the revolving credit commitment by a corresponding amount. The Revolver
including letters of credit will not be permitted to remain outstanding after payment of the Term
Loan. The First Amendment also provides for a reduction in amount of the Revolver from $85 million
to $59.5 million as of the date of the First Amendment. Under terms of the First Amendment, the
fixed charge coverage ratio is not tested at either September 30, 2010 or December 31, 2010, and
will be retested at the fiscal quarter ending March 31, 2011 and subsequent fiscal quarters.
Senior Notes During December 2008, the Company redeemed its then outstanding 9 7/8% senior
notes (the Senior Notes) issued by MedCath Holdings Corp., a wholly owned subsidiary of the
Company, for $111.2 million, which included the payment of a repurchase premium of $5.0 million and
accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the
Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium,
the Company incurred $2.0 million in expense related to the write-off of previously incurred
financing costs associated with the Senior Notes. The repurchase premium and write off of
previously incurred financing costs have been included in the consolidated statements of operations
as loss on early extinguishment of debt for the year ended September 30, 2009.
Debt Covenants At September 30, 2009, the Company was in violation of financial covenants under
equipment loans at its consolidated subsidiary TexSan Heart Hospital, which has been accounted for
as a discontinued operation. Accordingly, the total outstanding balance for these loans of $6.1
million was included in the current liabilities of discontinued operations on the Companys
consolidated balance sheet. The covenant violations did not result in any other non-compliance
related to the remaining covenants governing the Companys outstanding debt; therefore the Company
was in compliance with all other covenants. Furthermore, these loans were paid in-full as of
September 30, 2010. As of September 30, 2010, the Company was in compliance with all covenants
governing its outstanding debt.
Interest Rate Swaps During the year ended September 30, 2006 one of the hospitals in which the
Company has a noncontrolling interest and consequently accounts for under the equity method,
entered into an interest rate swap for purposes of hedging variable interest payments on long term
debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by
the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive
income of the hospital. The Company recorded its proportionate share of comprehensive income within
stockholders equity in the consolidated balance sheets based on the Companys ownership interest
in that hospital.
Future Maturities Presented below are the future maturities of long-term debt at September 30,
2010.
|
|
|
|
|
Fiscal Year |
|
Debt Maturity |
|
2011 |
|
$ |
14,063 |
|
2012 |
|
|
52,500 |
|
|
|
|
|
|
|
$ |
66,563 |
|
|
|
|
|
20
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Obligations Under Capital Leases
The Company currently leases several diagnostic and therapeutic facilities, mobile catheterization
laboratories, office space, computer software and hardware, equipment and certain vehicles under
capital leases expiring through fiscal year 2015. 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 is included in
depreciation expense. Total assets under capital leases (net of accumulated depreciation of $3.2
million and $3.0 million) at September 30, 2010 and 2009, respectively, are $9.2 million and $2.7
million, respectively, and are included in property and equipment on the consolidated balance
sheets. Lease payments during the years ended September 30, 2010, 2009, and 2008 were $2.3 million,
$1.1 million and $1.1 million, respectively, and include interest of $0.4 million, $0.2 million,
and $0.1 million, respectively.
Future minimum lease payments at September 30, 20010 are as follows:
|
|
|
|
|
|
|
Minimum |
|
Fiscal Year |
|
Lease Payment |
|
2011 |
|
$ |
3,106 |
|
2012 |
|
|
2,607 |
|
2013 |
|
|
2,104 |
|
2014 |
|
|
1,708 |
|
2015 |
|
|
789 |
|
|
|
|
|
Total future minimum lease payments |
|
|
10,314 |
|
Less amounts representing interest |
|
|
(1,205 |
) |
|
|
|
|
Present value of net minimum lease payments |
|
|
9,109 |
|
Less current portion |
|
|
(2,609 |
) |
|
|
|
|
|
|
$ |
6,500 |
|
|
|
|
|
11. Liability Insurance Coverage
During June 2010 and 2009, the Company entered into a one-year claims-made policy providing
coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per
claim. The Company also purchased additional insurance to reduce the retained liability per claim
to $250,000 for the MedCath Partners Division, for each respective fiscal year. Because
of the Companys self-insured retention levels, the Company is required to recognize an estimated
expense/liability for the amount of retained liability applicable to each malpractice claim. As of
September 30, 2010 and September 30, 2009, the total estimated liability for the Companys
self-insured retention on medical malpractice claims, including an estimated amount for incurred
but not reported claims, was $2.7 million and $3.8 million, respectively, which is included in
other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve
based on actuarial estimates using the Companys historical experience with claims and assumptions
about future events.
In addition to reserves for medical malpractice, the Company also maintains reserves for
self-insured workmans compensation, healthcare and dental coverage. The total estimated reserve
for self-insured liabilities for workmans compensation, employee health and dental claims was $3.3
million and $3.0 million as of September 30, 2010 and September 30, 2009, respectively, which is
included in other accrued liabilities in the consolidated balance sheets. The Company maintains
this reserve based on historical experience with claims. The Company maintains commercial stop loss
coverage for health and dental insurance program of $175,000 per plan participant.
12. Commitments and Contingencies
Operating Leases The Company currently leases several cardiac diagnostic and therapeutic
facilities, mobile catheterization laboratories, office space, computer software and hardware
equipment, certain vehicles and land under noncancelable operating leases expiring through fiscal
year 2017. Total rent expense under noncancelable rental commitments was approximately $1.5
million, $2.2 million and $2.3 million for the years ended September 30, 2010, 2009 and 2008,
respectively, and is included in other operating expenses in the accompanying consolidated
statements of income.
21
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The approximate future minimum rental commitments under noncancelable operating leases as of
September 30, 2010 are as follows:
|
|
|
|
|
|
|
Rental |
|
Fiscal Year |
|
Commitment |
|
2011 |
|
$ |
1,724 |
|
2012 |
|
|
1,601 |
|
2013 |
|
|
1,562 |
|
2014 |
|
|
1,300 |
|
2015 |
|
|
397 |
|
Thereafter |
|
|
99 |
|
|
|
|
|
|
|
$ |
6,683 |
|
|
|
|
|
Put and Call Options During August 2010, the Company amended its partnership agreement with
one of its hospitals, whereby call and put options were added relative to the Companys
noncontrolling interest in the hospital. The call option will allow the Company to acquire all of
the noncontrolling interest in the hospital owned by physician investors for the net amount of the
physician investors unreturned capital contributions adjusted upward for any proportionate share of
additional proceeds upon a disposition transaction. The put option allows the Companys
noncontrolling shareholders in the hospital to put their shares to the Company for the net amount
of the physician investors unreturned capital contributions at any time before August 31, 2011.
The noncontrolling shareholders recorded basis in their partnership interest was zero prior to the
amendment of this agreement. Accordingly, the Company has recognized a redeemable noncontrolling
interest of $2.9 million (net of taxes of $1.6 million) as of September 30, 2010 and included the
corresponding expense as a loss allocable to noncontrolling interests.
During September 2010, the Company entered into a call agreement with one of its hospitals whereby
the Company may exercise the call right to purchase the noncontrolling interest owned by physician
investors for an amount equal to the net amount of the physician investors unreturned capital
contributions ($2.7 million at September 30, 2010).
Contingencies The Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings, court decisions,
executive orders and freezes and funding reductions, all of which may significantly affect the
Company. In addition, reimbursement is generally subject to adjustment following audit by third
party payors, including commercial payors as well as the contractors who administer the Medicare
program for the Centers for Medicare and Medicaid Services (CMS).
Final determination of amounts due providers under the Medicare program often takes several years
because of such audits, as well as resulting provider appeals and the application of technical
reimbursement provisions. The Company believes that adequate provisions have been made for any
adjustments that might result from these programs; however, due to the complexity of laws and
regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted
and the other complexities involved in estimating net revenue, there is a possibility that recorded
estimates will change by a material amount in the future.
In 2005, CMS began using recovery audit contractors (RAC) to detect Medicare overpayments not
identified through existing claims review mechanisms. RACs perform post-discharge audits of medical
records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered
services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to
look back at claims up to three years old, provided that the claim was paid on or after October 1,
2007. Claims identified as overpayments will be subject to the Medicare appeals process. The Health
Care Reform Laws expand the RAC programs scope to include Medicaid claims by requiring all states
to enter into contracts with RACs by December 31, 2010. The Company believes the claims for
reimbursement submitted to the Medicare and Medicaid programs by the Companys facilities have been
accurate, however the Company is unable to reasonably estimate what the potential result of future
RAC audits or other reimbursement matters could be.
The Company is involved in various claims and legal actions in the ordinary course of business,
including malpractice claims arising from services provided to patients that have been asserted by
various claimants and additional claims that may be asserted for known incidents through September
30, 2010. These claims and legal actions are in various stages, and some may ultimately be brought
to trial. Moreover, additional claims arising from services provided to patients in the past and
other legal actions may be asserted in the future. The Company is protecting its interests in all
such claims and actions and does not expect the ultimate resolution of these matters to have a
material adverse impact on the Companys consolidated financial position, results of operations or
cash flows.
22
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to
carotid artery stent procedures performed during prior fiscal years at two of the Companys
consolidated subsidiary hospitals. The U.S. Department of Justice (DOJ) initiated an
investigation related to the Companys return of these reimbursements. As a result of the DOJs
investigation, the Company began negotiating settlement agreements during the second quarter of
fiscal 2009 with the DOJ whereby the Company was expected to pay $0.8 million to settle
and obtain releases from any federal civil false claims liability related to the DOJs
investigation. The DOJ allegations do not involve patient care, and relate solely to whether the
procedures were properly reimbursable by Medicare. The settlement does not include any finding of
wrong-doing or any admission of liability. During fiscal 2010, the Company paid $0.8 million
initially accrued within other accrued liabilities on the consolidated balance sheet as of
September 30, 2009. As of September 30, 2010, both settlement agreements have been executed.
In March 2010, the DOJ issued a civil investigative demand (CID) pursuant to the federal False
Claims Act to one of the Companys hospitals. The CID requested information regarding Medicare
claims submitted by the hospital in connection with the implantation of implantable cardioverter
defibrillators (ICDs) during the period 2002 to the present. The Company has complied with all
information requested by the DOJ for this hospital.
In September 2010, the Company received a letter from the DOJ advising it that an investigation is
being conducted to determine whether certain of the Companys other hospitals have submitted claims
excluded from coverage. The period of time covered by the investigation is 2003 to the present. The
letter states that the DOJs data indicates that many of the Companys hospitals have claims for
the implantation of ICDs which were not medically indicated and/or otherwise violated Medicare
payment policy. The Company understands that the DOJ has submitted similar requests to many other
hospitals and hospital systems across the country as well as to the ICD manufacturers themselves.
The Company is fully cooperating and has entered into a tolling agreement with the government in
this investigation; to date, the DOJ has not asserted any claim against the Companys other
hospitals. Because the Company is in the early stages of this investigation, the Company is unable
to evaluate the outcome of this investigation. The Companys total ICD net revenue is a material
component of total net patient revenue.
On January 8, 2009, the California Supreme Court ruled in Prospect Medical Group, Inc., et al. v.
Northridge Emergency Medical Group, et al. (2009) 45 Cal. 4th 497, that under
Californias Knox-Keene statute healthcare providers may not bill patients for covered emergency
out patient services for which health plans or capitated payors are invoiced by the provider but
fail to pay the provider. The California Supreme Court held that the only recourse for healthcare
providers is to pursue the payors directly. The Prospect decision does not apply to amounts that
the health plan or capitated payor is not obligated to pay under the terms of the insureds policy
or plan. Although the decision only considered emergency providers and referred to HMOs and
capitated payors, future court decisions on how the so-called balance billing statute is
interpreted does pose a risk to healthcare providers that perform emergency or other out-patient
services in the state of California.
During October, 2009, a purported class action law suit was filed by an individual against the
Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the
plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare
Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits
the practice of balance billing for patients who are provided emergency services. On November 24,
2010, the court granted the Bakersfield Heart Hospitals motion to strike plaintiffs class
allegations.
In addition to reserves for medical malpractice, the Company also maintains reserves for
self-insured workmans compensation, healthcare and dental coverage. The total estimated reserve
for self-insured liabilities for workmans compensation, employee health and dental claims was $3.3
million and $3.0 million as of September 30, 2010 and September 30, 2009, respectively, which is
included in other accrued liabilities in the consolidated balance sheets. The Company maintains
this reserve based on historical experience with claims. The Company maintains commercial stop loss
coverage for health and dental insurance program of $175,000 per plan participant.
The Company has evaluated the provisions of the Health Care Reform Laws. The Company is unable to
predict at this time the full impact of the Health Care Reform Laws on the Company and its
consolidated financial statements.
Commitments The Companys consolidated subsidiary hospitals provide guarantees to certain
physician groups for funds required to operate and maintain services for the benefit of the
hospitals patients including emergency care and anesthesiology services, among other services.
These guarantees extend for the duration of the underlying service agreements. As of September 30,
2010, the maximum potential future payments that the Company could be required to make under these
guarantees was approximately $28.2 million ($0.7 million related to discontinued operations)
through June 2013. At September 30, 2010 the Company had total liabilities of $13.0 million ($0.7
million related to discontinued operations) for the fair value of these guarantees, of which $7.9
million is in other accrued liabilities and $0.3 million is in current liabilities of discontinued
operations, and $4.4 million is in other long term obligations and $0.4 million is in long-term
liabilities of discontinued operations. Additionally, the Company had assets of $13.3 million ($0.7
million related to discontinued operations) representing the future services to be provided by the
physicians, of which $7.8 million is in prepaid expenses and other current assets and $0.3 million
in current assets of discontinued operations, and $4.8 million is in other assets and $0.4 million
in non-current assets of discontinued operations.
23
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Fair Value Measurements
As described in Note 2 Recently Adopted Accounting Pronouncements, the Company adopted the
accounting standard issued by the FASB that defines fair value, establishes a framework for
measuring fair value and enhances disclosures about fair value measures required under other
accounting pronouncements. The Company is required to provide additional disclosures about fair
value measurements for each major category of assets and liabilities measured at fair value on a
non-recurring basis. Our non-financial assets and liabilities not permitted or required to be
measured at fair value on a recurring basis typically relate to long-lived assets held and used and
long-lived assets held for sale (including investments in affiliates). Fair values were determined
as follows:
|
|
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical
assets or liabilities, which generally are not applicable to non-financial assets and
liabilities. |
|
|
|
Level 2 inputs utilize data points that are observable, such as independent third
party market offers. |
|
|
|
Level 3 inputs are unobservable data points for the asset or liability, and include
situations where there is little, if any, market activity for the asset or liability,
such as internal estimates of discounted cash flows or third party appraisals. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
Significant Other |
|
|
Significant |
|
|
Year Ended |
|
|
|
Market |
|
|
Observable |
|
|
Unobservable |
|
|
9/30/10 |
|
|
|
Price |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Impairments |
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
certain long-lived
assets |
|
$ |
|
|
|
$ |
33,545 |
|
|
$ |
33,122 |
|
|
$ |
63,678 |
|
Partners Division
certain long-lived
assets |
|
|
|
|
|
|
|
|
|
|
10,047 |
|
|
|
800 |
|
Partners Division
Investments in
Affiliates |
|
|
|
|
|
|
7,400 |
|
|
|
|
|
|
|
1,915 |
|
Corporate and other
certain long-lived
assets |
|
|
|
|
|
|
|
|
|
|
4,880 |
|
|
|
2,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division
certain long-lived
assets |
|
$ |
|
|
|
$ |
32,000 |
|
|
$ |
|
|
|
$ |
5,249 |
|
Partners Division
certain long-lived
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other
certain long-lived
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As described in Note 4, we recorded $63.7 million, $0.8 million and $2.3 million impairment charges
in continuing operations in the fiscal year ended September 30, 2010 for the write-down of
buildings, land, equipment and other long-lived assets in the Hospital Division, Partners Division
and Corporate and other, respectively. The Hospital Division charge relates to one of our
hospitals due to a decline in the fair value of real estate in the market in which the hospitals
operate and a decline in the estimated fair value of equipment based on discounted cash flows. In
addition, the Hospital Division charge relates to one of our hospitals that received a letter of
intent from a third party buyer. As described in Note 8, we recorded a $1.9 million write-down of
investments in affiliates related to two of the Partners Division affiliates in which the Company
has entered into agreements or disposed of its interest in such affiliates. As described in Note
3, we recorded a $5.2 million impairment charge in discontinued operations related to a hospital in
which the Company entered into an agreement to dispose of its interest.
24
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on Level 3 inputs, the estimated fair value of long-term debt, including the current portion,
at September 30, 2010 was $108.1 million ($41.5 million related to discontinued operations) as
compared to a carrying value of $101.2 million ($34.6 million related to discontinued operations).
Based on Level 3 inputs, at September 30, 2009, the estimated fair value of long-term debt,
including the current portion, was $127.6 million ($47.6 million related to discontinued
operations) as compared to a carrying value of $121.4 million ($41.4 million related to
discontinued operations). Fair value of the Companys fixed rate debt was estimated using
discounted cash flow analyses, based on the Companys current incremental borrowing rates for
similar types of arrangements and market information. The fair value of the Companys variable rate
debt was determined to approximate its carrying value due to the underlying variable interest
rates.
The Companys cash equivalents are measured utilizing Level 1 or Level 2 inputs.
14. Income Taxes
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(6,571 |
) |
|
$ |
2,247 |
|
|
$ |
2,418 |
|
State |
|
|
546 |
|
|
|
709 |
|
|
|
2,611 |
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense (benefit) |
|
|
(6,025 |
) |
|
|
2,956 |
|
|
|
5,029 |
|
Deferred tax expense (benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(19,179 |
) |
|
|
(3,302 |
) |
|
|
2,365 |
|
State |
|
|
(975 |
) |
|
|
177 |
|
|
|
(758 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense (benefit) |
|
$ |
(20,154 |
) |
|
$ |
(3,125 |
) |
|
$ |
1,607 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
$ |
(26,179 |
) |
|
$ |
(169 |
) |
|
$ |
6,636 |
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Property and equipment |
|
$ |
6,794 |
|
|
$ |
24,481 |
|
Equity investments |
|
|
2,151 |
|
|
|
2,151 |
|
Accrued liabilities |
|
|
1,060 |
|
|
|
|
|
Gain on sale of partnership units |
|
|
2,461 |
|
|
|
2,461 |
|
Other |
|
|
|
|
|
|
568 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
12,466 |
|
|
|
29,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating and economic loss carryforward |
|
$ |
5,118 |
|
|
$ |
4,447 |
|
Basis difference in investment in subsidiaries |
|
|
15,768 |
|
|
|
5,642 |
|
Allowances for doubtful accounts and other reserves |
|
|
7,396 |
|
|
|
8,859 |
|
Accrued liabilities |
|
|
3,830 |
|
|
|
3,736 |
|
Intangibles |
|
|
2,185 |
|
|
|
2,293 |
|
Share based compensation expense |
|
|
4,623 |
|
|
|
4,531 |
|
Management contracts |
|
|
330 |
|
|
|
586 |
|
Other |
|
|
216 |
|
|
|
545 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
39,466 |
|
|
|
30,639 |
|
Valuation allowance |
|
|
(4,610 |
) |
|
|
(2,691 |
) |
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
22,390 |
|
|
$ |
(1,713 |
) |
|
|
|
|
|
|
|
As of September 30, 2010 and 2009, the Company had recorded a valuation allowance of
$4.6 million and $2.7 million, respectively, primarily related to state net operating loss
carryforwards. The valuation allowance increased by approximately $1.9 million during the year
ended September 30, 2010 due to a current year loss incurred in certain states.
25
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has state net operating loss carryforwards of approximately $116.3 million that began
to expire in 2009.
The differences between the U.S. federal statutory tax rate and the effective rate are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Statutory federal income tax rate |
|
|
-35.0 |
% |
|
|
-35.0 |
% |
|
|
35.0 |
% |
State income taxes, net of federal effect |
|
|
-3.2 |
% |
|
|
0.4 |
% |
|
|
4.8 |
% |
State valuation allowances on NOLs |
|
|
2.9 |
% |
|
|
1.7 |
% |
|
|
-2.3 |
% |
Noncontrolling interest |
|
|
-4.3 |
% |
|
|
-10.2 |
% |
|
|
-16.6 |
% |
Share-based compensation expense |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
1.3 |
% |
Penalties |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
0.0 |
% |
Goodwill |
|
|
0.0 |
% |
|
|
42.7 |
% |
|
|
0.0 |
% |
Other non-deductible expenses and adjustment |
|
|
-0.2 |
% |
|
|
-0.3 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
-39.8 |
% |
|
|
-0.5 |
% |
|
|
23.9 |
% |
|
|
|
|
|
|
|
|
|
|
In June 2006, the FASB issued a new accounting standard that established a single model to
address the accounting for uncertain tax positions. The new accounting standard clarified the
accounting for income taxes by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. The new accounting standard
also provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
The Company adopted the new accounting standard effective October 1, 2007. As a result of the
implementation, the Company recognized a $0.3 million net increase to the reserves for uncertain
tax positions. This increase was accounted for as a cumulative effect adjustment and recognized as
a reduction in beginning retained earnings in the consolidated balance sheet. Including the
cumulative effect adjustment, the Company had approximately $2.4 million of unrecognized tax
benefits as of October 1, 2007 and $0.5 million as of September 30, 2009 recorded in other accrued
liabilities on the consolidated balance sheets. There is no unrecognized tax benefit as of
September 30, 2010. Of the balance at September 30, 2009 $0.3 million represented the amount of
unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate
in any future periods. It is not expected that the amount of unrecognized tax benefits will change
in the next twelve months.
The Company includes interest related to tax issues as part of interest expense in the consolidated
financial statements. The Company records applicable penalties, if any, related to tax issues
within the income tax provision. The Company did not have an accrual for interest as of September
30, 2010 and had $0.2 million accrued for interest as of September 30, 2009. The interest impact
for the unrecognized tax liabilities was $(0.2) million to the consolidated financial results for
fiscal 2010. There were no penalties recorded for the unrecognized tax benefits.
Following is a reconciliation of the Companys unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Beginning Balance |
|
$ |
519 |
|
|
$ |
1,234 |
|
|
$ |
2,424 |
|
Additions based on tax positions of prior years |
|
|
|
|
|
|
|
|
|
|
640 |
|
Settlements |
|
|
|
|
|
|
(514 |
) |
|
|
|
|
Reductions for positions of prior years |
|
|
(519 |
) |
|
|
(201 |
) |
|
|
(1,830 |
) |
|
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
|
|
|
$ |
519 |
|
|
$ |
1,234 |
|
|
|
|
|
|
|
|
|
|
|
Under the normal three year federal statute of limitations, the Company may be subject to
examination by the Internal Revenue Service (IRS) back to September 30, 2007. In addition, the
Company files income tax returns in multiple states and local jurisdictions. Generally, the Company
is subject to state and local audits going back to years ended September 30, 2007; however, due to
existing net operating loss carryforwards, the state can audit back to September 30, 1998 and
September 30, 1999 in a few significant states.
26
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In the ordinary course of the Companys business there are transactions where the ultimate tax
determination is uncertain. The Company believes that is has adequately provided for income tax
issues not yet resolved with federal, state and local tax authorities. If an ultimate tax
assessment exceeds the Companys estimate of tax liabilities, an additional charge to expense would
result.
15. Per Share Data
Basic The calculation of basic earnings per share includes 150,900 and 101,500 of restricted
stock units that have vested but as of September 30, 2010 and 2009, respectively, have not been
converted into common stock. No restricted stock units vested as of September 30, 2008. See Note
16 as it relates to restricted stock units granted to directors of the Company.
Diluted The calculation of diluted earnings per share considers the potential dilutive effect
of options to purchase 932,137, 1,027,387, and 1,776,837 shares of common stock at prices ranging
from $9.95 to $33.05, which were outstanding at September 30, 2010, 2009 and 2008, respectively, as
well as 694,322, 552,827 and 123,982 shares of restricted stock which were outstanding at September
30, 2010, 2009 and 2008, respectively. Of the outstanding stock options and restricted stock,
1,580,214, and 947,000 have not been included in the calculation of diluted earnings (loss) per
share at September 30, 2009 and 2008, respectively, because the options and restricted stock were
anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings
per share at September 30, 2010, as the consideration of such shares would be anti-dilutive due to
the loss from continuing operations, net of tax.
16. Stock Compensation Plans
On July 28, 1998, the Companys board of directors adopted a stock option plan (the 1998 Stock
Option Plan) under which it may grant incentive stock options and nonqualified stock options to
officers and other key employees. Under the 1998 Stock Option Plan, the board of directors may
grant option awards and determine the option exercise period, the option exercise price, and other
such conditions and restrictions on the grant or exercise of the option as it deems appropriate.
The 1998 Stock Option Plan provides that the option exercise price may not be less than the fair
value of the common stock as of the date of grant and that the options may not be exercised more
than ten years after the date of grant. Options granted during the year ended September 30, 2008
were granted at an option exercise price equal to or greater than fair market value of the
underlying stock at the date of the grant and become exercisable on grading and fixed vesting
schedules ranging from 4 to 8 years subject to certain performance acceleration features. Effective
September 30, 2005, the compensation committee of the board of directors approved a plan to
accelerate the vesting of substantially all unvested stock options previously awarded to employees,
subject to a Restriction Agreement. No options may be granted under the 1998 Stock Option Plan
after July 31, 2008. At September 30, 2010, 420,137 options were outstanding under the 1998 Option
Plan.
On July 23, 2000, the Company adopted an outside directors stock option plan (the Directors
Plan) under which nonqualified stock options may be granted to non-employee directors. Under the
Directors Plan, grants of 2,000 options were granted to each new director upon becoming a member
of the board of directors and grants of 2,000 options were made to each continuing director on
October 1, 1999 (the first day of the fiscal year ended September 30, 2000). Effective September
15, 2000, the Directors Plan was amended to increase the number of options granted for future
awards from 2,000 to 3,500. Further, effective September 30, 2007, the Directors Plan was amended
to increase the number of options granted for future awards from 3,500 to 8,000. All options
granted under the Directors Plan through September 30, 2010 have been granted at an exercise price
equal to or greater than the fair market value of the underlying stock at the date of the grant.
Options are exercisable immediately upon the date of grant and expire ten years from the date of
grant. Effective March 5, 2008, the Directors Plan was amended to increase the maximum number of
common stock shares which can be issued under the Directors Plan to 550,000, of which 192,900 were
outstanding as of September 30, 2010.
Effective October 1, 2005, the Company adopted the MedCath Corporation 2006 Stock Option and Award
Plan (the Stock Plan), which provides for the issuance of stock options, restricted stock and
restricted stock units to employees of the Company. The Stock Plan is administered by the
compensation committee of the board of directors, who has the authority to select the employees
eligible to receive
awards. This committee also has the authority under the Stock Plan to determine the types of
awards, select the terms and conditions attached to all awards, and, subject to the limitation on
individual awards in the Stock Plan, determine the number of shares to be awarded. At September 30,
2010, the maximum number of shares of common stock which can be issued through awards granted under
the Stock Plan was 1,750,000 of which 1,203,385 were outstanding as of September 30, 2010.
Stock options granted to employees under the Stock Plan have an exercise price per share that
represents the fair market value of the common stock of the Company on the respective dates that
the options are granted. The options expire ten years from the grant date, are fully vested as of
the date of grant, and are exercisable at any time. Subsequent to the exercise of stock options,
the shares of stock acquired upon exercise may be subject to certain sale restrictions depending on
the optionees employment status and length of time the options were held prior to exercise.
27
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company recognized share-based compensation expense for the fiscal years ended September 30,
2010, 2009 and 2008 of $3.1 million, $2.4 million and $5.0 million, respectively. The associated
tax benefits related to the compensation expense recognized for fiscal 2010, 2009 and 2008 was $1.3
million, $1.0 million and $2.0 million, respectively. No options were granted during the fiscal
year ended September 30, 2010. The weighted-average grant-date fair value of options granted during
the fiscal years ended September 30, 2009 and 2008 was $9.75 and $10.53, respectively. No options
were exercised during fiscal 2010. The total intrinsic value of options exercised during fiscal
2008 was $1.4 million. The total intrinsic value of options exercised during fiscal 2009 was
immaterial. There was no intrinsic value of options outstanding at September 30, 2010.
Stock Options
Stock option activity for the Companys stock compensation plans during the years ended September
30, 2010, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
Number of |
|
|
Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding options, September 30, 2007 |
|
|
1,727,112 |
|
|
$ |
19.11 |
|
Granted |
|
|
480,000 |
|
|
|
24.51 |
|
Exercised |
|
|
(269,996 |
) |
|
|
15.99 |
|
Cancelled |
|
|
(160,279 |
) |
|
|
26.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2008 |
|
|
1,776,837 |
|
|
$ |
22.15 |
|
Granted |
|
|
82,000 |
|
|
|
17.46 |
|
Exercised |
|
|
(7,000 |
) |
|
|
10.95 |
|
Cancelled |
|
|
(824,450 |
) |
|
|
21.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2009 |
|
|
1,027,387 |
|
|
$ |
22.25 |
|
Cancelled |
|
|
(95,250 |
) |
|
|
25.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, September 30, 2010 |
|
|
932,137 |
|
|
$ |
21.89 |
|
|
|
|
|
|
|
|
|
The following table summarizes information for options outstanding and exercisable at
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable |
|
|
Number of |
|
|
|
|
|
|
Options |
|
Weighted- |
|
Weighted- |
|
|
Outstanding |
|
Average |
|
Average |
|
|
and |
|
Remaining |
|
Exercise |
Range of Prices |
|
Exercisable |
|
Life (years) |
|
Price |
9.95 - 15.80 |
|
|
108,137 |
|
|
|
4.24 |
|
|
$ |
13.69 |
|
16.10 - 18.26 |
|
|
20,500 |
|
|
|
4.05 |
|
|
|
17.15 |
|
19.00 - 21.01 |
|
|
59,500 |
|
|
|
3.20 |
|
|
|
19.48 |
|
21.49 - 21.49 |
|
|
500,000 |
|
|
|
5.39 |
|
|
|
21.49 |
|
21.66 - 23.65 |
|
|
30,500 |
|
|
|
5.04 |
|
|
|
22.35 |
|
23.79 - 27.71 |
|
|
142,000 |
|
|
|
6.60 |
|
|
|
26.56 |
|
27.80 - 29.68 |
|
|
36,500 |
|
|
|
6.30 |
|
|
|
29.06 |
|
30.35 - 33.05 |
|
|
35,000 |
|
|
|
6.64 |
|
|
|
32.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9.95 - 33.05 |
|
|
932,137 |
|
|
|
5.34 |
|
|
$ |
21.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock Awards
During the year ended September 30, 2006, the Company granted to employees 270,836 shares of
restricted stock units, which vested at various dates through March 2009. The compensation expense,
which represents the fair value of the stock measured at the market price at the date of grant,
less estimated forfeitures, was recognized on a straight-line basis over the vesting period.
During fiscal 2010 and 2009, the Company granted to employees 401,399 and 599,645 shares of
restricted stock, respectively. There were no grants to employees during fiscal 2008. Restricted
stock granted to employees, excluding executives of the Company, vest annually on December 31 over
a three year period. Executives of the Company (defined by the Company as vice president or higher)
received two equal grants of restricted stock. The first grant vests annually in equal installments
on December 31 over a three year period. The second grant vests annually on December 31 over a
three year period if certain performance conditions are met. All unvested restricted stock granted
to employees becomes fully vested upon a change in control of the Company as defined in the
Companys 2006 Stock Option and Award Plan. During fiscal 2010 and 2009, the Company granted
89,600 and 101,500 shares of restricted stock units to directors. There were no grants to directors
during fiscal 2008. Restricted stock units granted to directors are fully vested at the date of
grant and are paid in shares of common stock upon each applicable directors termination of service
on the board. At September 30, 2010 the Company had $3.0 million of unrecognized compensation
expense associated with restricted stock awards.
Activity for the Companys restricted stock issued under the Stock Plan during the years ended
September 30, 2010, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted- |
|
|
|
|
|
|
|
Awards |
|
|
Average |
|
|
|
|
|
|
|
and Units |
|
|
Grant Price |
|
Outstanding restricted stock awards and units, |
|
September 30, 2007 |
|
|
193,982 |
|
|
$ |
19.72 |
|
Vested |
|
|
|
|
|
|
(21,448 |
) |
|
|
20.50 |
|
Cancelled |
|
|
|
|
|
|
(48,552 |
) |
|
|
20.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units, |
|
September 30, 2008 |
|
|
123,982 |
|
|
$ |
19.28 |
|
Granted |
|
|
|
|
|
|
701,145 |
|
|
|
9.00 |
|
Vested |
|
|
|
|
|
|
(52,106 |
) |
|
|
20.50 |
|
Cancelled |
|
|
|
|
|
|
(118,694 |
) |
|
|
11.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units, |
|
September 30, 2009 |
|
|
654,327 |
|
|
$ |
9.64 |
|
Granted |
|
|
|
|
|
|
490,999 |
|
|
|
7.24 |
|
Vested |
|
|
|
|
|
|
(181,214 |
) |
|
|
8.48 |
|
Cancelled |
|
|
|
|
|
|
(79,827 |
) |
|
|
8.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding restricted stock awards and units, |
|
September 30, 2010 |
|
|
884,285 |
|
|
$ |
8.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Employee Benefit Plan
The Company has a defined contribution retirement savings plan (the 401(k) Plan) which covers all
employees. The 401(k) Plan allows employees to contribute from 1% to 50% of their annual
compensation on a pre-tax basis. The Company, at its discretion, may make an annual contribution of
up to 40% of an employees pretax contribution, up to a maximum of 6% of compensation. The
Companys contributions to the 401(k) Plan for the years ended September 30, 2010, 2009 and 2008
were approximately $1.4 million, $1.3 million and $1.2 million, respectively.
29
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Related Party Transactions
As compensation for the Companys guarantee of certain unconsolidated affiliate hospitals long term
debt, the Company receives a debt guarantee fee; see Note 9 for further discussion. Debt guarantee
fees recorded in net revenues in the consolidated statement of operations were $0.4 million for the
years ended September 30, 2010, 2009 and 2008. Additionally the Company receives a management fee
from unconsolidated affiliates. Management fees recorded within net revenues in the consolidated
statement of operations were $4.4 million, $5.0 million, and $5.4 million for the years ended
September 30, 2010, 2009 and 2008, respectively. At September 30, 2010 and 2009 the Company had
$1.3 million and $1.6 million of outstanding fees recorded of which $0.4 million and $1.0 million
was recorded within accounts receivable, net and $0.9 million and $0.5 million within prepaid
expenses and other current assets, respectively, in the consolidated balance sheets primarily
related to management, insurance and legal fees charged to unconsolidated affiliates, see Note 8
for further discussion regarding unconsolidated affiliates of the Company.
19. Summary of Quarterly Financial Data (Unaudited)
Summarized quarterly financial results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2010 |
|
|
|
First Quarter |
|
|
Second Quarter (*) |
|
|
Third Quarter (*) |
|
|
Fourth Quarter (*) |
|
Net revenue |
|
$ |
87,830 |
|
|
$ |
96,777 |
|
|
$ |
96,026 |
|
|
$ |
96,293 |
|
Operating expenses |
|
|
90,493 |
|
|
|
109,713 |
|
|
|
118,723 |
|
|
|
125,279 |
|
Loss from operations |
|
|
(2,663 |
) |
|
|
(12,936 |
) |
|
|
(22,697 |
) |
|
|
(28,986 |
) |
Loss from continuing operations, net of taxes |
|
|
(1,902 |
) |
|
|
(8,970 |
) |
|
|
(14,251 |
) |
|
|
(25,362 |
) |
(Loss) income from discontinued operations, net of taxes |
|
|
(754 |
) |
|
|
(2,239 |
) |
|
|
1,435 |
|
|
|
3,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,656 |
) |
|
$ |
(11,209 |
) |
|
$ |
(12,816 |
) |
|
$ |
(21,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.09 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.72 |
) |
|
$ |
(1.25 |
) |
Discontinued operations |
|
$ |
(0.04 |
) |
|
|
(0.11 |
) |
|
|
0.08 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, basic |
|
$ |
(0.13 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.64 |
) |
|
$ |
(1.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.09 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.72 |
) |
|
$ |
(1.25 |
) |
Discontinued operations |
|
$ |
(0.04 |
) |
|
|
(0.11 |
) |
|
|
0.08 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share, diluted |
|
$ |
(0.13 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.64 |
) |
|
$ |
(1.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic |
|
|
19,743 |
|
|
|
19,829 |
|
|
|
19,897 |
|
|
|
19,898 |
|
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted |
|
|
19,743 |
|
|
|
19,829 |
|
|
|
19,897 |
|
|
|
19,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
The second, third and fourth quarters of fiscal 2010 includes $14.7
million; $22.8 million; and $29.3 million, respectively, impairment of property
and equipment as discussed in Note 4. |
|
|
|
As a result of the classification of certain businesses as discontinued
operations as discussed in Note 3, the Company has recast the presentation of
the results of such businesses for all periods as compared to the presentation
in the respective quarterly report as filed on Form 10-Q. In fiscal year 2010,
this resulted in (i) a reduction in revenues of $59,430 in the first quarter,
$38,132 in the second quarter and $35,821 in the third quarter; (ii) a
reduction in operating expenses of $59,610 in the first quarter, $42,828 in the
second quarter and $35,583 in the third quarter; (iii) a decrease in loss from
operations of $180 in the first quarter, a decrease of $4,696 in the second
quarter and an increase of $238 in the third quarter; (iv) a decrease in loss
from continuing operations, net of taxes of $609 in the first quarter, a
decrease of $3,029 in the second quarter and an increase of $96 in the third
quarter; and (v) an increase in loss from discontinued operations, net of taxes
of $609 in the first quarter, an increase in loss of $3,029 in the second
quarter and an increase in income of $96 in the third quarter. |
30
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2009 |
|
|
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter (*) |
|
Net revenue |
|
$ |
86,116 |
|
|
$ |
87,040 |
|
|
$ |
84,902 |
|
|
$ |
85,791 |
|
Operating expenses |
|
|
81,192 |
|
|
|
80,768 |
|
|
|
82,242 |
|
|
|
131,080 |
|
Income (loss) from operations |
|
|
4,924 |
|
|
|
6,272 |
|
|
|
2,660 |
|
|
|
(45,289 |
) |
(Loss) income from continuing operations, net of taxes |
|
|
(2,435 |
) |
|
|
3,405 |
|
|
|
1,651 |
|
|
|
(43,873 |
) |
Income (loss) from discontinued operations, net of taxes |
|
|
4,681 |
|
|
|
2,177 |
|
|
|
(1,155 |
) |
|
|
(14,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,246 |
|
|
$ |
5,582 |
|
|
$ |
496 |
|
|
$ |
(58,606 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.13 |
) |
|
$ |
0.17 |
|
|
$ |
0.08 |
|
|
$ |
(2.22 |
) |
Discontinued operations |
|
|
0.24 |
|
|
|
0.11 |
|
|
$ |
(0.05 |
) |
|
|
(0.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, basic |
|
$ |
0.11 |
|
|
$ |
0.28 |
|
|
$ |
0.03 |
|
|
$ |
(2.97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.13 |
) |
|
$ |
0.17 |
|
|
$ |
0.08 |
|
|
$ |
(2.22 |
) |
Discontinued operations |
|
|
0.24 |
|
|
|
0.11 |
|
|
$ |
(0.05 |
) |
|
|
(0.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share, diluted |
|
$ |
0.11 |
|
|
$ |
0.28 |
|
|
$ |
0.03 |
|
|
$ |
(2.97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic |
|
|
19,599 |
|
|
|
19,664 |
|
|
|
19,733 |
|
|
|
19,740 |
|
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted |
|
|
19,599 |
|
|
|
19,690 |
|
|
|
19,733 |
|
|
|
19,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
The fourth quarter of fiscal 2009 includes $42.0 million impairment of goodwill as discussed in Note 4.
As a result of the classification of certain businesses as discontinued operations as discussed in Note 3, the
Company has recast the presentation of the results of such businesses for all periods as compared to the
presentation in the respective quarterly report as filed on Form 10-Q for fiscal 2010. In fiscal year 2009, this
resulted in (i) a reduction in revenues of $64,129 in the first quarter, $43,727 in the second quarter, $39,686 in
the third quarter and $62,176 in the fourth quarter; (ii) a reduction in operating expenses of $62,061 in the first
quarter, $41,867 in the second quarter, $42,201 in the third quarter and $79,680 in the fourth quarter; (iii) a
decrease in income from operations of $2,068 in the first quarter, a decrease of $1,860 in the second quarter, an
increase of $2,515 in the third quarter and a increase of $17,505 in the fourth quarter; (iv) an increase in loss
from continuing operations, net of taxes of $520 in the first quarter, a decrease in income of $815 in the second
quarter, an increase in income of $1,628 in the third quarter and a decrease in loss of $18,027 in the fourth
quarter; and (v) an increase in income from discontinued operations, net of taxes of $520 in the first quarter, an
increase in income of $815 in the second quarter and a decrease in income of $1,628 in the third quarter and a
decrease in income of $18,027 in the fourth quarter. |
20. Reportable Segment Information
The Companys reportable segments consist of the Hospital Division and the MedCath Partners
Division. The Hospital Division consists of freestanding, licensed general acute care hospitals
that provide a wide range of health services with a focus on cardiovascular care. MedCath Partners
Division consists of cardiac diagnostic and therapeutic facilities that are either freestanding or
located within unrelated hospitals. MedCath Partners Division provides management services to
facilities or operates facilities directly on a contracted basis.
There is no aggregation of operating segments within each reportable segment. The Company believes
these reportable business segments properly align the various operations of the Company with how
the chief operating decision maker views the business. The Companys chief operating decision maker
regularly reviews financial information about each of these reportable business segments in
deciding how to allocate resources and evaluate performance.
31
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial information concerning the Companys operations by each of the reportable segments as of
and for the years ended September 30 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
365,055 |
|
|
$ |
326,787 |
|
|
$ |
319,240 |
|
MedCath Partners Division |
|
|
11,440 |
|
|
|
16,645 |
|
|
|
18,070 |
|
Corporate and other |
|
|
431 |
|
|
|
417 |
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
376,926 |
|
|
$ |
343,849 |
|
|
$ |
337,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations (*): |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
(51,784 |
) |
|
$ |
(29,855 |
) |
|
$ |
59,299 |
|
MedCath Partners Division |
|
|
(1,536 |
) |
|
|
7,204 |
|
|
|
(361 |
) |
Corporate and other |
|
|
(13,962 |
) |
|
|
(8,782 |
) |
|
|
(30,452 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
(67,282 |
) |
|
$ |
(31,433 |
) |
|
$ |
28,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
19,864 |
|
|
$ |
14,831 |
|
|
$ |
13,121 |
|
MedCath Partners Division |
|
|
3,186 |
|
|
|
4,708 |
|
|
|
4,066 |
|
Corporate and other |
|
|
657 |
|
|
|
651 |
|
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
23,707 |
|
|
$ |
20,190 |
|
|
$ |
17,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (income) including intercompany, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
15,693 |
|
|
$ |
13,573 |
|
|
$ |
16,163 |
|
MedCath Partners Division |
|
|
14 |
|
|
|
(5 |
) |
|
|
|
|
Corporate and other |
|
|
(11,586 |
) |
|
|
(10,599 |
) |
|
|
(7,591 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
4,121 |
|
|
$ |
2,969 |
|
|
$ |
8,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
net earnings of unconsolidated affiliates: |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
5,143 |
|
|
$ |
5,045 |
|
|
$ |
5,502 |
|
MedCath Partners Division |
|
|
1,969 |
|
|
|
3,785 |
|
|
|
2,157 |
|
Corporate and other |
|
|
155 |
|
|
|
227 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
7,267 |
|
|
$ |
9,057 |
|
|
$ |
7,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
14,824 |
|
|
$ |
80,700 |
|
|
$ |
62,048 |
|
MedCath Partners Division |
|
|
209 |
|
|
|
|
|
|
|
1,890 |
|
Corporate and other |
|
|
788 |
|
|
|
4,755 |
|
|
|
3,891 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
15,821 |
|
|
$ |
85,455 |
|
|
$ |
67,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Included in (loss) income from operations for fiscal 2010 are
impairment charges of $63.6 million, $0.9 million and $2.3
million in the Hospital Division, MedCath Partners Division and
Corporate and other, respectively. Included in (loss) income
from operations for fiscal 2009 is an impairment charge of $42.0
million in the Hospital Division as discussed in Note 4. |
32
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
Aggregate identifiable assets: |
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
414,656 |
|
|
$ |
517,849 |
|
MedCath Partners Division |
|
|
20,210 |
|
|
|
27,205 |
|
Corporate and other |
|
|
59,672 |
|
|
|
45,394 |
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
494,538 |
|
|
$ |
590,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in affiliates: |
|
|
|
|
|
|
|
|
Hospital Division |
|
$ |
508 |
|
|
$ |
2,834 |
|
MedCath Partners Division |
|
|
8,382 |
|
|
|
11,075 |
|
Corporate and other |
|
|
100 |
|
|
|
146 |
|
|
|
|
|
|
|
|
Consolidated totals |
|
$ |
8,990 |
|
|
$ |
14,055 |
|
|
|
|
|
|
|
|
Substantially all of the Companys net revenue in its Hospital Division and MedCath Partners
Division is derived directly or indirectly from patient services. The amounts presented for
Corporate and other primarily includes general overhead and administrative expenses and financing
activities as components of (loss) income from operations and certain cash and cash equivalents,
prepaid expenses, other assets, and operations of the business not subject to separate segment
reporting within identifiable assets.
The Hospital Division assets include $165.7 million and $182.2 million of assets related to
discontinued operations as of September 30, 2010 and 2009, respectively. The MedCath Partners
Division assets included $1.5 million and $20.8 million of assets related to discontinued
operations as of September 30, 2010 and 2009, respectively.
21. Treasury Stock
During fiscal 2007, the board of directors approved a stock repurchase program of up to $59.0
million. During fiscal 2008 1,885,461 million shares of common stock, with a total cost of $44.4
million, were repurchased by the Company under this program. There were no repurchases of common
stock during fiscal 2010 and 2009.
22. Supplemental Cash Flow Disclosures
Supplemental disclosures of cash flow information for the years ended September 30, 2010, 2009 and
2008 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
3,256 |
|
|
$ |
6,937 |
|
|
$ |
10,904 |
|
Income taxes paid |
|
$ |
634 |
|
|
$ |
6,212 |
|
|
$ |
26,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures financed by capital leases |
|
$ |
5,318 |
|
|
$ |
4,186 |
|
|
$ |
1,324 |
|
Accrued capital expenditures |
|
$ |
3,501 |
|
|
$ |
6,888 |
|
|
$ |
13,896 |
|
Subsidiary stock issued in exchange for services at fair market value |
|
$ |
185 |
|
|
$ |
|
|
|
$ |
|
|
23. Subsequent Events
As further discussed in Note 4, the Company disposed of i) its interest in AzHH on October 1, 2010;
ii) its interest in a subsidiary that provides consulting services in October 2010; and iii) its
interest in HHA on November 1, 2010. Such entities met the requirements under
GAAP to be presented as discontinued operations as of September 30, 2010.
In connection with the sale of HHA, $34.8 million of long-term debt was repaid with the proceeds
along with an $11.1 million prepayment penalty.
In addition to the above dispositions, the Company sold its minority equity interest in Southwest
Arizona Heart and Vascular Center, LLC for $7.0 million on November 1, 2010 and its minority equity
interest in Avera Heart Hospital of South Dakota on October 1, 2010 for $20.0 million.
33
MEDCATH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, the Company entered into a definitive agreement in November 2010 to dispose of its
interest in TexSan Heart Hospital. This transaction is expected to close in the second fiscal
quarter of 2011, which ends March 31, subject to regulatory approval and customary closing
conditions. As such entity did not meet the requirements under GAAP to be presented as a
discontinued operation as of September 30, 2010, its operations are included in the current
operations of the Company in this annual report. However, commencing with the first quarter of
2011, TexSan Heart Hospital will be classified as a discontinued operation in the Companys
filings.
The Company has entered into transition services agreements with the buyers of its sold assets that
extend into fiscal 2011. As a result, subsequent to September 30, 2010, the Company entered into a
Managed Services Agreement with McKesson Technologies, Inc. (McKesson) whereby McKesson would
employ the majority of the Companys information technology employees effective November 1, 2010.
During December 2010, the Company exercised its call right with one of its hospitals under a
Put/Call Agreement. The Put/Call Agreement permits the Company to call the minority equity equal
to the net amount of the minority equity holders unreturned capital contributions adjusted upward
for any proportionate share of additional proceeds upon a disposition of the hospital. The call
right is in effect for up to one year upon notice of the Companys intent to exercise its call
right.
34