| • | | 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. Fair values determined by Level 2 inputs utilize data points that are observable, such as appraisals or established market values of comparable assets. Fair values determined by 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 future cash flows. | | | | | | | | | | | | | | | | | | | | | | | | | | | Significant | | | | | | | | | | | Significant Other | | | Unobservable | | | | | | | March 31, | | | Observable Inputs | | | Inputs | | | Total | | | | 2010 | | | (Level 2) | | | (Level 3) | | | Impairments | | Long-lived assets held and used (1) | | $ | 78,899 | | | $ | 32,000 | | | $ | 46,899 | | | $ | (19,948 | ) | Investment in Affiliates (2) | | | 400 | | | | 400 | | | | — | | | | (114 | ) | | | | | | | | | | | | | | | | $ | 79,299 | | | $ | 32,400 | | | $ | 46,899 | | | $ | (20,062 | ) | | | | | | | | | | | | | |
| | | (1) | | See Notes 1 and 13 | | (2) | • | | See Note 5Level 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. |
The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at December 31, 2010 and September 30, 2010. Based on Level 3 inputs, the fair value of long-term debt, including the current portion, at December 31, 2010 approximates the carrying value. Based on Level 3 inputs, the 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 carrying values of $101.2 million ($34.6 million related to discontinued operations). The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates. The Company’s cash equivalents are measured utilizing Level 1 or Level 2 inputs. 14. Subsequent Events On January 1, 2011, MedCath Partners sold its investment in one of its investments accounted for under the equity method for $0.6 million. On January 5, 2011, the Company made a principal repayment of $20.6 million using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million at that date. In January 2011, the Company obtained from its noncontrolling members of one of its hospitals, the right to sell all or substantially all of the assets of that hospital. Concurrent with the granting of such right and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in the hospital. The approval, consent and proxy allows the Company to sell all or substantially all of the assets of that hospital and the Company will pay to the noncontrolling members the net amount of their unreturned capital contributions ($3.0 million at December 31, 2010) adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. 17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report onForm 10-K for the fiscal year ended September 30, 2009.2010. Overview General. We are a healthcare provider focused primarily on providing high acuity services, predominantlyincluding the diagnosis and treatment of cardiovascular disease. We own and operate hospitals in partnership with physicians whom we believe have established reputations for clinical excellence. We have ownershipAs noted below, during the first quarter of fiscal 2011, we sold three of our majority owned hospitals and our equity interest in one of our minority owned hospitals. As a result, at December 31, 2010, we currently own interests in and operate tensix hospitals, with a total of 825 licensed beds, 58 of which are related to HHA, whose assets, liabilities, and operations are included within discontinued operations. Our nine hospitals, which currently comprise our continuing operations, have 767533 licensed beds, of which 677489 are staffed and available, and that are located predominately in high growth markets in sevenfive states: Arizona, Arkansas, California, Louisiana, New Mexico South Dakota, and Texas.During May 2009, we completedTexas. Each of our 79majority-owned hospitals is a freestanding, licensed bed expansion at Louisiana Medical Center and Heart Hospital and built space for an additional 40 beds at that hospital. During October 2009, we opened a newgeneral acute care hospital Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodatethat provides a totalwide range of 106 licensed beds,health services with an initial openinga majority focus on cardiovascular care. Each of 70 of its licensed beds.our hospitals has a 24-hour emergency room staffed by emergency department physicians. In addition to our hospitals, we currently own and/or manage 14seven cardiac diagnostic and therapeutic facilities. NineSix of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining five facilities arefacility is not located at hospitalsa hospital and offers only diagnostic procedures. The Company also operates two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.” Pursuant to a favorable regulatory settlement (“Settlement Agreement”) that MedCath entered into on August 14, 1995 with the State of North Carolina Department of Human Resources (now known as the Division of Health Service Regulation (“DHSR”)), MedCath obtained authority to operate nine cardiac catheterization laboratories within the state of North Carolina. The rights under the Settlement Agreement were subsequently assigned to MedCath Partners in connection with a reorganization by MedCath. The Settlement Agreement allows MedCath Partners to operate these catheterization labs anywhere in North Carolina without a need for further state review, with some exceptions. No certificate of need (“CON”) is required for MedCath Partners to operate any one of these nine diagnostic or interventional laboratories in the state. MedCath Partners is required to comply with certain notice requirements for replacement of any equipment in these laboratories and has historically notified the DHSR when MedCath Partners is changing the location of any laboratories located within the State. However, the DHSR takes the position that MedCath Partners must own and provide the services of the equipment which comprises each laboratory — the CON exemption applies only when MedCath Partners is operating one of these specific nine laboratories. On March 1, 2010, the Companywe announced that itsour Board of Directors had formed a Strategic Options Committee composed solely of independent directors to consider the sale either of the Company or the sale of itsour individual hospitals and other assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed several transactions, including: | • | | The disposition of Arizona Heart Hospital (Phoenix, AZ) in which we sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010. We anticipate that we will receive final net proceeds of approximately $31.5 million from the transaction after payment of retained known liabilities, payment of taxes related to the transaction and collection of the hospital’s accounts receivable. The $31.5 million in estimated net proceeds is prior to any reserves, if any, required in management’s judgment to address any potential contingent liabilities. | | | • | | The disposition of our wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota (Sioux Falls, SD) to Avera McKennan for $20.0 million, plus a percentage of the hospital’s available cash. The transaction was completed October 1, 2010. We estimate that we will receive final net proceeds from the transaction of approximately $16.0 million, after payment of estimated taxes related to the transaction and prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities. | | | • | | The disposition of Heart Hospital of Austin (Texas) in which we and our physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010. We anticipate that we will receive final net proceeds of approximately $24.1 million from the transaction after repayment of third party debt and a related prepayment fee, payment of all known retained liabilities of the partnership, payment of taxes related to the transaction, collection of the partnerships accounts receivable, and distributions to the hospital’s minority partners. The $24.1 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities. |
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| • | | The disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010. We estimate that final net proceeds from the transaction will total approximately $6.9 million, after closing costs and income tax benefit related to a tax loss on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities. | | | • | | The disposition of TexSan Heart Hospital (San Antonio, Texas) in which we and our physician owners sold substantially all of the hospital’s assets to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction was completed on December 31, 2010. We estimate that final net proceeds from the transaction will total approximately $60.8 million, after closing costs and income taxes on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities. |
We cannot assure our investors that our continuing efforts to enhance stockholder value will be successful, or whether future transactions will involve a sale of the Company, a sale of our individual hospitals or other assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value. Although the salestrategic options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of its interestscenarios for distributing available cash to our stockholders, such as special cash dividends and/or distributions to stockholders following future sales of individual hospitals or other assets or in those assets.the context of a dissolution, and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction. Same Facility Hospitals.Our policyMany unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic options process, we are unable to include, on a same facility basis, only those facilitiesdetermine the approach that were openbest meets the interests of our stockholders. Final amounts available to stockholders will be diminished by asset and operational during the full currentcorporate wind-down related operating and prior fiscal year comparable periods. For example, on a same facility basis for our consolidated hospital division for the threeother expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed and six months ended March 31, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.any required reserves to address liabilities, including retained and contingent liabilities and/or other unforeseen events. Revenue Sources by Division.The largest percentage of our net revenue is attributable to our Hospital Division.hospital division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below. | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Six Months Ended March 31, | | Three Months Ended December 31, | Division | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | Hospital | | | 97.6 | % | | | 96.4 | % | | | 97.2 | % | | | 96.2 | % | | | 97.4 | % | | | 96.1 | % | MedCath Partners | | | 2.3 | % | | | 3.5 | % | | | 2.7 | % | | | 3.7 | % | | | 2.5 | % | | | 3.8 | % | Corporate and other | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % | | | | | | | | | | | | | | | | Net Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | | | | | | | | | | | | | |
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Revenue Sources by Payor.We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. Generally, ourOur net revenue is determinedimpacted by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of admitting payor in the periods indicated. | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Six Months Ended March 31, | | Three Months Ended December 31, | Payor | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | Medicare | | | 55.4 | % | | | 57.5 | % | | | 54.2 | % | | | 53.3 | % | | | 50.8 | % | | | 53.9 | % | Medicaid | | | 4.2 | % | | | 5.2 | % | | | 4.2 | % | | | 3.9 | % | | | 4.3 | % | | | 3.9 | % | Commercial and other, including self-pay | | | 40.4 | % | | | 37.3 | % | | | 41.6 | % | | | 42.8 | % | | | 44.9 | % | | | 42.2 | % | | | | | | | | | | | | | | | | Total consolidated net revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | | | | | | | | | | | | | |
A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue towill remain significant in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients, and other similar factors. 19
The Medicare and Medicaid programs are subject to statutory and regulatory changes, (such as the recent Health Reform Laws), retroactive and prospective rate adjustments, administrative rulings, court decisions, audits, investigations, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment and possible recoupment following audit by all third party payors, including commercial payors and the fiscal intermediariescontractors who administer the Medicare program i.e.,for the CMS.Center for Medicare and Medicaid Services (“CMS’) as well as the Office of Inspector General. 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. We believe that adequate provision has 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 our net revenue, there is a possibility that recorded estimates will change by a material amount in the future. 19
Results of Operations Three Months Ended MarchDecember 31, 2010 Compared to Three Months Ended MarchDecember 31, 2009 Statement of Operations Data.The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | | (in thousands except percentages) | | | | | | | | | | | | Increase/(Decrease) | | | % of Net Revenue | | | | 2010 | | | 2009 | | | $ | | | % | | | 2010 | | | 2009 | | Net revenue | | $ | 134,909 | | | $ | 130,767 | | | $ | 4,142 | | | | 3.2 | % | | | 100.0 | % | | | 100.0 | % | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Personnel expense | | | 46,444 | | | | 44,662 | | | | 1,782 | | | | 4.0 | % | | | 34.4 | % | | | 34.2 | % | Medical supplies expense | | | 36,849 | | | | 35,120 | | | | 1,729 | | | | 4.9 | % | | | 27.3 | % | | | 26.9 | % | Bad debt expense | | | 11,918 | | | | 8,798 | | | | 3,120 | | | | 35.5 | % | | | 8.9 | % | | | 6.7 | % | Other operating expenses | | | 29,743 | | | | 27,342 | | | | 2,401 | | | | 8.8 | % | | | 22.0 | % | | | 20.9 | % | Pre-opening expenses | | | — | | | | 380 | | | | (380 | ) | | | (100.0 | )% | | | — | | | | 0.3 | % | Depreciation | | | 7,768 | | | | 6,217 | | | | 1,551 | | | | 24.9 | % | | | 5.8 | % | | | 4.7 | % | Amortization | | | 8 | | | | 8 | | | | — | | | | — | | | | — | | | | 0.0 | % | Impairment of property and equipment | | | 19,948 | | | | — | | | | 19,948 | | | | 100.0 | % | | | 14.8 | % | | | — | | (Gain) loss on disposal of property, equipment and other assets | | | (76 | ) | | | 108 | | | | (184 | ) | | | (170.4 | )% | | | — | | | | 0.1 | % | | | | | | | | | | | | | | | | | | | | (Loss) income from operations | | | (17,693 | ) | | | 8,132 | | | | (25,825 | ) | | | (317.6 | )% | | | (13.2 | )% | | | 6.2 | % | Other income (expenses): | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | (1,149 | ) | | | (581 | ) | | | 568 | | | | 97.8 | % | | | (0.8 | )% | | | (0.4 | )% | Loss on early extinguishment of debt | | | — | | | | 259 | | | | (259 | ) | | | (100.0 | )% | | | — | | | | 0.2 | % | Interest and other income | | | 23 | | | | 73 | | | | (50 | ) | | | (68.5 | )% | | | 0.0 | % | | | 0.1 | % | Loss on note receiveable | | | (1,507 | ) | | | — | | | | (1,507 | ) | | | (100.0 | )% | | | (1.1 | )% | | | — | | Equity in net earnings of unconsolidated affiliates | | | 3,092 | | | | 2,714 | | | | 378 | | | | 13.9 | % | | | 2.3 | % | | | 2.1 | % | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations before income taxes | | | (17,234 | ) | | | 10,597 | | | | (27,831 | ) | | | (262.6 | )% | | | (12.8 | )% | | | 8.1 | % | Income tax (benefit) expense | | | (7,386 | ) | | | 2,610 | | | | (9,996 | ) | | | (383.0 | )% | | | (5.5 | )% | | | 2.0 | % | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations | | | (9,848 | ) | | | 7,987 | | | | (17,835 | ) | | | (223.3 | )% | | | (7.3 | )% | | | 6.1 | % | Income from discontinued operations, net of taxes | | | 1,163 | | | | 2,060 | | | | (897 | ) | | | (43.5 | )% | | | 0.9 | % | | | 1.6 | % | | | | | | | | | | | | | | | | | | | | Net (loss) income | | | (8,685 | ) | | | 10,047 | | | | (18,732 | ) | | | (186.4 | )% | | | (6.4 | )% | | | 7.7 | % | Less: Net income attributable to noncontrolling interest | | | (2,524 | ) | | | (4,465 | ) | | | (1,941 | ) | | | (43.5 | )% | | | (1.9 | )% | | | (3.4 | )% | | | | | | | | | | | | | | | | | | | | Net (loss) income attributable to MedCath Corporation | | $ | (11,209 | ) | | $ | 5,582 | | | $ | (16,791 | ) | | | (300.8 | )% | | | (8.3 | )% | | | 4.3 | % | | | | | | | | | | | | | | | | | | | | | | Amounts attributable to MedCath Corporation common stockholders: | | | | | | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations, net of taxes | | $ | (11,999 | ) | | $ | 4,220 | | | $ | (16,219 | ) | | | (384.3 | )% | | | (8.9 | )% | | | 3.2 | % | Income from discontinued operations, net of taxes | | | 790 | | | | 1,362 | | | | (572 | ) | | | (42.0 | )% | | | 0.6 | % | | | 1.1 | % | | | | | | | | | | | | | | | | | | | | Net (loss) income | | $ | (11,209 | ) | | $ | 5,582 | | | $ | (16,791 | ) | | | (300.8 | )% | | | (8.3 | )% | | | 4.3 | % | | | | | | | | | | | | | | | | | | | |
HMMC, which is located in Kingman, AZ, opened in October 2009. For comparison purposes, the selected operating data below are presented on an actual consolidated basis and on a same facility basis for the periods indicated. Same facility basis excludes HMMC from operations for the three and six months ended March 31, 2010. | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended December 31, | | | | | | | | (in thousands except percentages) | | | | | | | | | | | | Increase/ | | | | | | | | | | | | | | | (Decrease) | | | % of Net Revenue | | | | 2010 | | | 2009 | | | % | | | 2010 | | | 2009 | | Net revenue | | $ | 88,900 | | | $ | 87,830 | | | | 1.2 | % | | | 100.0 | % | | | 100.0 | % | Operating expenses: | | | | | | | | | | | | | | | | | | | | | Personnel expense | | | 32,454 | | | | 31,636 | | | | 2.6 | % | | | 36.5 | % | | | 36.0 | % | Medical supplies expense | | | 19,222 | | | | 22,107 | | | | (13.1 | )% | | | 21.6 | % | | | 25.2 | % | Bad debt expense | | | 9,709 | | | | 7,506 | | | | 29.3 | % | | | 10.9 | % | | | 8.5 | % | Other operating expenses | | | 24,116 | | | | 22,344 | | | | 7.9 | % | | | 27.1 | % | | | 25.4 | % | Pre-opening expenses | | | — | | | | 866 | | | | (100.0 | )% | | | — | | | | 1.0 | % | Depreciation | | | 4,887 | | | | 5,938 | | | | (17.7 | )% | | | 5.5 | % | | | 6.8 | % | Loss on disposal of property, equipment and other assets | | | 93 | | | | 96 | | | | (3.1 | )% | | | 0.1 | % | | | 0.2 | % | | | | | | | | | | | | | | | | | Loss from operations | | | (1,581 | ) | | | (2,663 | ) | | | (40.6 | )% | | | (1.8 | )% | | | (3.0 | )% | Other income (expenses): | | | | | | | | | | | | | | | | | | | | | Interest expense | | | (1,082 | ) | | | (945 | ) | | | (14.5 | )% | | | (1.2 | )% | | | (1.1 | )% | Interest and other income, net | | | 489 | | | | 70 | | | | (598.6 | )% | | | 0.6 | % | | | 0.1 | % | Gain on sale of unconsolidated affiliates | | | 15,391 | | | | — | | | | N/M | | | | 17.3 | % | | | — | | Equity in net earnings of unconsolidated affiliates | | | 602 | | | | 1,516 | | | | (60.3 | )% | | | 0.7 | % | | | 1.6 | % | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | 13,819 | | | | (2,022 | ) | | | (783.4 | )% | | | 15.6 | % | | | (2.3 | )% | Income tax expense (benefit) | | | 4,482 | | | | (1,337 | ) | | | (435.2 | )% | | | 5.0 | % | | | (1.5 | )% | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | 9,337 | | | | (685 | ) | | | (1463.1 | )% | | | 10.5 | % | | | (0.8 | )% | Income (loss) from discontinued operations, net of taxes | | | 39,128 | | | | (1,130 | ) | | | (3562.7 | )% | | | 44.0 | % | | | (1.3 | )% | | | | | | | | | | | | | | | | | Net income (loss) | | | 48,465 | | | | (1,815 | ) | | | (2770.2 | )% | | | 54.5 | % | | | (2.1 | )% | Less: Net income attributable to noncontrolling interest | | | (11,426 | ) | | | (841 | ) | | | 1258.6 | % | | | (12.9 | )% | | | (1.0 | )% | | | | | | | | | | | | | | | | | Net income (loss) attributable to MedCath Corporation | | $ | 37,039 | | | $ | (2,656 | ) | | | (1494.5 | )% | | | 41.7 | % | | | (3.0 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts attributable to MedCath Corporation common stockholders: | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations, net of taxes | | $ | 7,162 | | | $ | (1,902 | ) | | | (476.6 | )% | | | 8.1 | % | | | (2.2 | )% | Income (loss) from discontinued operations, net of taxes | | | 29,877 | | | | (754 | ) | | | (4062.5 | )% | | | 33.6 | % | | | (0.9 | )% | | | | | | | | | | | | | | | | | Net income (loss) | | $ | 37,039 | | | $ | (2,656 | ) | | | (1494.5 | )% | | | 41.7 | % | | | (3.0 | )% | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | | | | | | | | | | | | | 2010 Same | | | | | 2010 | | 2009 | | % Change | | Facility | | % Change | | | | | | | | | | | | | | | | | | | | | | Selected Operating Data (a): | | | | | | | | | | | | | | | | | | | | | Number of hospitals | | | 7 | | | | 6 | | | | | | | | 6 | | | | | | Licensed beds (b) | | | 600 | | | | 451 | | | | | | | | 530 | | | | | | Staffed and available beds (c) | | | 514 | | | | 404 | | | | | | | | 444 | | | | | | Admissions (d) | | | 6,650 | | | | 6,199 | | | | 7.3 | % | | | 6,191 | | | | (0.1 | )% | Adjusted admissions (e) | | | 9,884 | | | | 8,812 | | | | 12.2 | % | | | 9,058 | | | | 2.8 | % | Patient days (f) | | | 25,368 | | | | 24,810 | | | | 2.2 | % | | | 23,531 | | | | (5.2 | )% | Adjusted patient days (g) | | | 37,156 | | | | 34,941 | | | | 6.3 | % | | | 33,940 | | | | (2.9 | )% | Average length of stay (days) (h) | | | 3.81 | | | | 4.00 | | | | (4.8 | )% | | | 3.80 | | | | (5.0 | )% | Occupancy (i) | | | 54.8 | % | | | 68.2 | % | | | | | | | 58.9 | % | | | | | Inpatient catheterization procedures (j) | | | 3,028 | | | | 3,077 | | | | (1.6 | )% | | | 2,940 | | | | (4.5 | )% | Inpatient surgical procedures (k) | | | 1,876 | | | | 1,842 | | | | 1.8 | % | | | 1,786 | | | | (3.0 | )% | Hospital net revenue (in thousands except percentages) | | $ | 130,645 | | | $ | 125,652 | | | | 4.0 | % | | $ | 123,386 | | | | (1.8 | )% |
The following table presents selected operating data on a consolidated basis for the periods indicated: | | | | | | | | | | | | | | | Three Months Ended December 31, | | | 2010 | | 2009 | | % Change | | | | | | | | | | | | | | Selected Operating Data (a): | | | | | | | | | | | | | Number of hospitals | | | 5 | | | | 5 | | | | | | Licensed beds (b) | | | 421 | | | | 421 | | | | | | Staffed and available beds (c) | | | 380 | | | | 380 | | | | | | Admissions (d) | | | 4,438 | | | | 4,482 | | | | (1.0 | )% | Adjusted admissions (e) | | | 6,841 | | | | 6,485 | | | | 5.5 | % | Patient days (f) | | | 16,254 | | | | 16,672 | | | | (2.5 | )% | Adjusted patient days (g) | | | 25,143 | | | | 24,324 | | | | 3.4 | % | Average length of stay (days) (h) | | | 3.66 | | | | 3.72 | | | | (1.4 | )% | Occupancy (i) | | | 46.5 | % | | | 47.7 | % | | | | | Inpatient catheterization procedures (j) | | | 1,792 | | | | 1,964 | | | | (8.8 | )% | Inpatient surgical procedures (k) | | | 1,032 | | | | 1,085 | | | | (4.9 | )% | Hospital net revenue (in thousands except percentages) | | $ | 86,618 | | | $ | 84,382 | | | | 2.6 | % |
| | | (a) | | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements. | | (b) | | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use. | | (c) | | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. | | (d) | | Admissions represent the number of patients admitted for inpatient treatment. | | (e) | | Adjusted admissions areis a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. | | (f) | | Patient days represent the total number of days of care provided to inpatients. | | (g) | | Adjusted patient days areis a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. | | (h) | | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. | | (i) | | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds. | | (j) | | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period. | | (k) | | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
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Net Revenue.Our consolidated net revenue increased 3.2%1.2% or $4.1$1.1 million to $134.9$88.9 million for the secondfirst quarter of fiscal 20102011 from $130.8$87.8 million for the secondfirst quarter of fiscal 2009.2010. Hospital Division net revenue increased 4.4%2.6%, or $5.6$2.2 million, for the secondfirst quarter of fiscal 20102011 compared to the same period of fiscal 2009. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts. As a result, certain expenses once incurred by our MedCath Partners Division and reimbursed, are no longer being billed nor incurred by our MedCath Partners Division.2010. There was a $0.5$1.1 million decrease in net revenue in our MedCath Partners Division as well as a $0.5 million reduction in expenses due to this billing change. Net revenue on a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Net revenue | | $ | 127,651 | | | $ | 130,767 | | | $ | (3,116 | ) | | | (2.4 | )% | | | 100.0 | % | | | 100.0 | % |
Division. Same facility inpatientInpatient net revenue was 72.3%69% of the Hospital Division’s total same facility net patient revenue for the secondfirst quarter of fiscal 2011 compared to 71% for the first quarter of fiscal 2010. Our total inpatient net revenue and cases decreased 3.4% and 2.0%, respectively during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, comparedwhereas outpatient net revenue and cases increased 9.3% and 31.5%, respectively during the same period. The decrease in inpatient net revenue is due to 73.8% fora 6.5% decline in our core cardiovascular cases offset by an 8.0% increase in our non-cardiovascular cases. Hualapai Mountain Medical Center, (“HMMC”), our newest hospital which began operations during the second quarter of fiscal 2009. Although inpatient cases for the secondfirst quarter of fiscal 2010, remained relatively flat,is a general acute care facility so it contributed to the increase in our total inpatient net revenue declined 3.8% as a result of a decline innon-cardiovascular procedures with higher net revenue per case such as open heart and AICD procedures. Inpatient open heart and AICD net revenues were down 9.3% and 25.8%, respectively, duringfor the secondfirst quarter of fiscal 2010 as compared to the comparable period. We believe the decline is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been increasingly successful in treating patients suffering from cardiovascular disease. In addition, we experienced a 20.4% reduction in inpatient bare metal stent net revenue. Our other inpatient catheterization procedures (excluding stent procedures) increased 29.4%, which offset these declines. Outpatient cases, excluding emergency department cases, and net revenue increased 2.1% and 5.0%, respectively for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009. The increase in outpatient cases and net revenue was due to an increase in outpatient AICD implants, pacer implants and EP studies/ablations, which experienced a 45.5% increase in net revenue and a 21.5% increase in cases. Emergency department visits increased 10.7% while emergency department net revenue remained flat during the second quarter of fiscal 20102011 compared to the same period of the prior yearyear. HMMC’s inpatient cases increased 106% due to the ramp up of the facility. HMMC also contributed to the increase in outpatient cases and net revenue, particularly related to emergency department cases.
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Excluding HMMC from both the first quarter of fiscal 2011 and 2010 (“same facility” basis), inpatient net revenue decreased $2.4 million, or 4.1%, and outpatient net revenue increased $1.1 million, or 5.0%, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Our same facility inpatient net revenue decrease is due to the mix of the procedures performed. We performed fewer procedures with higher reimbursement during the first quarter of fiscal 2011 compared to the same period of the prior year. Our same facility outpatient revenue increase is due to a 7.1% increase in same facility outpatient cases, particularly emergency department cases, due to the expansion at several of our facilities and more procedures being performed in an outpatient setting. Same facility netNet revenue for the secondfirst quarter of fiscal 20102011 included charity care deductions of $2.0$2.1 million compared to charity care deductions of $1.6$1.9 million for the secondfirst quarter of fiscal 2009.2010. The increase is the result of more uninsured patients applying and qualifying for charity care. Personnel expense.Our consolidated personnelPersonnel expense increased 4.0%2.6%, or $0.9 million, to $46.4$32.5 million for the secondfirst quarter of fiscal 20102011 from $44.7$31.6 million for the secondfirst quarter of fiscal 2009. Personnel expense on a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Personnel expense | | $ | 42,374 | | | $ | 44,662 | | | $ | (2,288 | ) | | | (5.1 | )% | | | 33.2 | % | | | 34.2 | % |
2010. The $2.3 million reductionincrease in same facility personnel expense was primarily due to a $1.4 million reduction in temporary contract labor and a $1.8 million reduction in other salaries and wages. Personnel expense continues to decline as we focus on efforts to better align our expenses with our reimbursements. These decreases were partially offset by an increase of $0.6 million in benefits and bonus expense for our Hospital Division and a $0.4$1.3 million increase in stock based compensation expense. Our benefits expense includesAs part of the strategic options process, the compensation committee of our medical claims costs. We experienced a higher cost per claimBoard of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the secondfirst quarter of fiscal 2010 compared2011 to fiscal 2009. Certain employees and directors were granted restricted stock during fiscal 2010 and 2009, thus incrementally increasing our quarterly expense. We recognize employee restrictedensure the deductibility of the compensation expense for federal corporate income tax purposes. The waiver caused all future stock based compensation expense related to the shares that would have vested over time as performance criteria were met to be recognized during the periodsfirst quarter of fiscal 2011. The shares subject to the waiver of vesting criteria contain transfer restrictions that will remain in which they are expectedplace until a change in control of the Company. In addition, management updated the estimate on the restricted share forfeiture rate since it is anticipated that the rate of employee turnover will decline as we continue to vest.progress with our strategic options process. We experienced a $0.5 million increase in expense related to hospital employee healthcare claims. This expense is directly attributed to the number of claims reported during the period. These increases were offset by a $0.9 million decline in salaries and wages and related benefits as we continue to monitor costs to better align these costs with net revenues and as the result of a reduction in management positions within hospital division as we sell our hospital assets. 22
Medical supplies expense.Our consolidated medicalMedical supplies expense increased 4.9%decreased 13.1%, or $2.9 million, to $36.8$19.2 million for the first quarter of fiscal 20102011 from $35.1$22.1 million for the second quarter of fiscal 2009. Medical supplies expense on a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Medical supplies expense | | $ | 35,394 | | | $ | 35,120 | | | $ | 274 | | | | 0.8 | % | | | 27.7 | % | | | 26.9 | % |
The $0.3 million increase in medical supplies expense is a result of a 2.8% increase in adjusted admissions on a same facility basis and as a result of the mix of procedures performed during the first quarter of fiscal 2010. We had an 11.4% reductionThis decline is due to $2.9 million in open heart surgeries and a 24.6% reduction in AICD implantations, open heart procedures have a higher net revenue per case as compared to other procedures performedsales tax refunds at two of our hospitals. With less open heart net revenue,Absent the refunds, medical supplies will increase as a percentageexpense was flat year over year. Medical supplies expense increased $0.7 million at HMMC which began operations in the second month of net revenue. Although our AICD net revenue has declined our cost per AICD has increased due to the typefirst quarter of devices used to treat our patients.fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was partially offset by an increasea decline in ICD expense as the utilizationresult of higher cost per unit devices.a 7.6% decline in ICD procedures for the first quarter of fiscal 2011 compared to the same period of the prior year.
Bad debt expense.Our consolidated badBad debt expense increased 35.5%29.3%, or $2.2 million, to $11.9$9.7 million for the secondfirst quarter of fiscal 20102011 from $8.8$7.5 million for the secondfirst quarter of fiscal 2009.2010. As a percentage of net revenue, bad debt expense increased to 8.9%10.9% for the secondfirst quarter of fiscal 20102011 as compared to 6.7%8.5% for the comparable period of fiscal 2009. Bad debt expense on2010. This increase is due to a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Bad debt expense | | $ | 11,121 | | | $ | 8,798 | | | $ | 2,323 | | | | 26.4 | % | | | 8.7 | % | | | 6.7 | % |
Our total same facility uncompensated care including charity care and bad debt expense was 10.5% of total same facility68.8%, or $3.2 million, increase in self-pay net patient hospital revenue for the secondfirst quarter of fiscal 20102011 compared to 8.2% of total same facility net patient revenue for the secondfirst quarter of fiscal 2009. The total number of patients that applied and qualified for charity care increased during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009. We reported $0.4 million more charity care deductions to net revenue during the second quarter of fiscal 2010 when compared to the second quarter of fiscal 2009. Bad debt expense alone (not including charity care) increased $2.3 million for the second quarter of fiscal 2010 compared to the same period of the prior year. This is directly attributable to a $2.4 million increase in our same facility self-pay revenue for the second quarter of fiscal 2010 compared to the same period of the prior year.2010. We reserve for the estimated bad debt on self-pay net revenue at the time of recognition.recognition based on our historical collection experience related to self-pay patients. This increase was offset by lower bad debt expense in certain markets due to lower net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.
Other operating expenses.Our consolidated otherOther operating expenses increased 8.8%7.9%, or $1.8 million, to $29.7$24.1 million for the secondfirst quarter of fiscal 20102011 from $27.3$22.3 million for the secondfirst quarter of fiscal 2009. Other operating expense on a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Other operating expense | | $ | 26,914 | | | $ | 27,342 | | | $ | (428 | ) | | | (1.6 | )% | | | 21.1 | % | | | 20.9 | % |
Our total same facility other operating expense decreased $0.4 million for the second quarter of fiscal 2010 compared to fiscal 2009.2010. The material and notable increases (decreases) in operating expenses were increases in employee benefit expense, legal and professional fees, and property taxes, mostly offset by reductions in professional liability insurance, bonus, and temporary labor and recruiting expenses, as reflected below (in millions):
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Professional liability insurance | | $ | (1.1 | ) | Corporate bonus expense | | $ | (1.0 | ) | Temporary labor and recruiting expense | | $ | (0.5 | ) | Property taxes | | $ | 0.4 | | Legal and professional fees | | $ | 0.7 | | Corporate employee benefits expense | | $ | 0.9 | | Other | | $ | 0.2 | |
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Professional fees | | $ | 1.2 | | Purchased services — nonclinical | | $ | 0.7 | | Corporate division medical benefits | | $ | 0.4 | | Repairs and maintenance | | $ | 0.3 | | Temporary labor | | $ | 0.3 | | Insurance expense | | $ | 0.2 | | Bonus expense | | $ | 0.2 | | Physician practice expenses | | $ | (0.3 | ) | Recruiting, relocation and travel expense | | $ | (0.4 | ) | Salaries and wages | | $ | (0.6 | ) |
Our professional fees have increased $1.2 million as the direct result of our strategic options process, which included the sale of several of our assets and the exploration of alternatives for the sale of our remaining assets or our equity. We will continue to incur professional fees during fiscal 2011 as our strategic options process continues. Our purchased services — nonclinical expense includes $1.3 million in third party consulting fees to obtain sales tax refunds on medical supplies at certain of our hospitals. As noted above under medical supplies expense, we filed sales tax refund claims of $2.9 million during the first quarter of fiscal 2011. The increase related to the consulting fees was offset by declines in non-clinical services as we control costs to better align with our net revenues. Our corporate division medical benefits expense increases as medical claims increase. The claims increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 is the direct cause for the $0.4 million increase. 2322
WeRepairs and maintenance costs have increased as our facilities age and also as a result of the addition of our newest hospital HMMC, which began operations in the second month of the first quarter of fiscal 2010. HMMC contributed $0.2 million of the total increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as maintenance costs were incurred specific large dollar claims for certain ofon the new facility. Temporary labor has increased at our corporate division to support our hospitals during the secondstrategic options process as full-time employed positions within the corporate division have declined. As discussed below, although our temporary labor has increased for the first quarter of fiscal 2009. We have experienced favorable claim experience so far for fiscal 2010. As a result in2011 compared to the reduction in specific claims duringfirst quarter of fiscal 2010, our salaries and favorable claim experiencewages for full-time employees declined by approximately $2.0 million year over year. Our insurance premiums increased during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2011. This increase is the result of changing the structure of some of our insurance programs to account for our overall strategic environment. Our bonus expense is recognized as bonuses are earned. The bonus expense for the current policy year,first quarter of fiscal 2011 increased $0.2 million as we anticipate more of our overall professional liability insurance cost has declined. Corporate bonuses are accruedhospitals will meet the fiscal 2011 bonus targets based on the expected attainmentfirst quarter of operating performance and/or individual goals. The reduction in corporate bonuses is a result of reducingfiscal 2011 results compared to the accrual for corporate bonuses to management’s current estimate of the attainment of these goals for the 2010first quarter of fiscal year.2010. We evaluate the progress of our bonus programs on a quarterly basis and adjust quarterly as deemed necessary.
Temporary laborOur relocation, recruiting and recruitingtravel expense has declined as we continue$0.4 million during the first quarter of fiscal 2011 compared to evaluatethe first quarter of fiscal 2010 due to our strategic options. In addition,options process. We hired several key positions were filled prior toexecutives during the secondfirst quarter of fiscal 2010, which has reduced our recruitingcontributed to a higher expense for fiscal 2010in the prior year compared to the same periodfirst quarter of the prior year.fiscal 2011. In addition, we have incurred less travel expense as assets are sold. Legal and professional fees are incurred as we evaluate our strategic options and fees relatedOur physician practice expenses have declined $0.3 million during the first quarter of fiscal 2011 compared to the pending sale of Heart Hospital of Austin. Corporate employee benefits expense has increased due to an increase in specific claims expense for our employees for the secondfirst quarter of fiscal 2010 as our primary care practice at one of our hospitals has decreased the total number of physicians within the practice. Conversely, there was a $0.4 million decline in revenues related to the primary care practice.
Salaries and wage expense declined $0.6 million for the first quarter of fiscal 2011 compared to the same periodfirst quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in severance expense and $0.4 million in retention bonus expense during the prior year.first quarter of fiscal 2011. The increase in severance and retention expense was offset by a $2.0 million decline in salaries and wages expense as corporate positions have been eliminated and/or consolidated as we align our costs with our revenues and as we sell assets that we support. Depreciation expense.Depreciation expense decreased $1.0 million to $4.9 million for the first quarter of fiscal 2011 from $5.9 million for the first quarter of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010. Interest expense.Interest expense increased $0.5$0.2 million to $1.1 million for the secondfirst quarter of fiscal 20102011 from $0.6$0.9 million for the secondfirst quarter of fiscal 2009.2010. The $0.5 million increase in interest expense is primarily attributable to a slight increase in the fact that no interest expense was capitalized duringrate charged on outstanding debt and an increase in the secondamount of assets under capital leases. Gain on sale of equity interests.The gain on sale of equity interests of $15.4 million for the first quarter of fiscal 2010, whereas $0.8 million of interest expense was capitalized during the comparable period of fiscal 2009 due2011 is related to the completionsale of our expansion projects and openinginterest in Avera Heart Hospital of HMMC. The increase in interest expense due to the cessation of capitalized interest wasSouth Dakota (“AHHSD”) partially offset by a nominal loss on the overall reduction in our outstanding debt resulting in lower interest payments during the second quarter of fiscal 2010. Loss on note receivable.Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to our determinationsale of the third party’s inability to repay the noteCompany’s interest in Southwest Arizona Heart and the insufficiency of the value of the collateral securing the note.Vascular Center, LLC. Such sales occurred on October 1, 2010 and November 1, 2010, respectively.
Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in two unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division. The Company owned two unconsolidated hospitals until the disposition of its interest in AHHSD on October 1, 2010. Net earnings of unconsolidated affiliates in which we have a noncontrolling interest increased during the second quarter of fiscal 2010 to $3.1 million from $2.7 million for the second quarter of fiscal 2009. Approximately $0.2 million of the increaseEquity in net earnings of unconsolidated affiliates wasdecreased during the first quarter of fiscal 2011 to $0.6 million from unconsolidated affiliates within our MedCath Partners Division and $0.2$1.5 million for the same period of fiscal 2010. AHHSD contributed $1.0 million of net earnings during the increasefirst quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings of unconsolidated affiliates was from unconsolidated affiliates within our Hospital Division.earnings. The $0.2 million increase for our MedCath Partners Division is related to increased volumes for one of our managed ventures offset by a $0.1 million impairment charge relatedCompany expects continued decreases due to the anticipated saledisposition of its investmentinterest in Tri-County. The remaining $0.2 million increase associated with our Hospital Division is related to favorable year over year results for Harlingen Medical Center.Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010. Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries decreasedincreased to $2.5$11.4 million for the secondfirst quarter of fiscal 20102011 from $4.5$0.8 million for the comparable period of fiscal 2009.2010. Net income attributable to noncontrolling interests on a same facility basis was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Net income attributable to noncontrolling interest | | $ | 3,294 | | | $ | 4,465 | | | $ | (1,171 | ) | | | (26.2 | )% | | | 2.6 | % | | | 3.4 | % |
On a same facility basis, net income attributable to noncontrolling interest decreased $1.2increased $7.1 million and $2.2 million due to a reductionthe noncontrolling shareholders’ interest in net incomethe gains recognized in fiscal 2011 upon the disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH in our disproportionate sharethe first quarter of losses from certainfiscal 2010 and the Company’s sale of our facilities.its interest in AzHH on October 1, 2010.
We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, seeCritical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.2010. 2423
Income tax expense (benefit) expense..Income tax benefitexpense (benefit) was $7.4an expense of $4.5 million for the secondfirst quarter of fiscal 2011 compared to a benefit of $(1.3) million for the first quarter of fiscal 2010, compared to an expense of $2.6 million for the second quarter of fiscal 2009, which represents an effective tax rate of approximately 38.1%32.4% and 38.2%(66.1)% for the respective periods. The first quarter fiscal 2011 effective rate is below our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests. The first quarter fiscal 2010 effective rate is above our federal statutory rate of 35.0% due to the recognition of a disproportionate share of the losses at certain of our hospitals, partially offset by the allocation of income allocable to our noncontrolling interests. The Company has recognized a disproportionate share of losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and committed capital of the Company’s partners or members. Income(Loss) income from discontinued operations, net of taxes.Income(Loss) income from discontinued operations, net of taxes reflects the results of DHH, HHA, Cape Cod, and Sun City for the second quarter of fiscal 2010 and fiscal 2009. Discontinued operations decreasedincreased to income of $1.2$26.1 million, net of taxes for the secondfirst quarter of fiscal 20102011 from incomea loss of $2.1$1.1 million, net of taxes, for the comparable period of fiscal 2009. Income from discontinued operations during the second quarter of fiscal 2010 reflected the operations of HHA and the related continued activities associated with previously divested facilities, which primarily related to accounts receivable and medical malpractice reserves. Income from discontinued operations from the same quarter of fiscal 2009 reflected the operating income from HHA and Sun City, offset by losses at DHH. Results of Operations
Six Months Ended March 31, 2010 Compared to Six Months Ended March 31, 2009
Statement of Operations Data.The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | (in thousands except percentages) | | | | | | | | | | | | Increase/(Decrease) | | | % of Net Revenue | | | | 2010 | | | 2009 | | | $ | | | % | | | 2010 | | | 2009 | | Net revenue | | $ | 258,967 | | | $ | 256,822 | | | $ | 2,145 | | | | 0.8 | % | | | 100.0 | % | | | 100.0 | % | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Personnel expense | | | 91,508 | | | | 88,029 | | | | 3,479 | | | | 4.0 | % | | | 35.3 | % | | | 34.3 | % | Medical supplies expense | | | 71,747 | | | | 69,357 | | | | 2,390 | | | | 3.4 | % | | | 27.7 | % | | | 27.0 | % | Bad debt expense | | | 22,599 | | | | 18,392 | | | | 4,207 | | | | 22.9 | % | | | 8.7 | % | | | 7.2 | % | Other operating expenses | | | 59,355 | | | | 54,502 | | | | 4,853 | | | | 8.9 | % | | | 23.0 | % | | | 21.2 | % | Pre-opening expenses | | | 866 | | | | 587 | | | | 279 | | | | 47.5 | % | | | 0.3 | % | | | 0.2 | % | Depreciation | | | 15,418 | | | | 12,713 | | | | 2,705 | | | | 21.3 | % | | | 6.0 | % | | | 5.0 | % | Amortization | | | 16 | | | | 16 | | | | — | | | | — | | | | 0.0 | % | | | 0.0 | % | Impairment of property and equipment | | | 19,948 | | | | — | | | | 19,948 | | | | 100.0 | % | | | 7.7 | % | | | — | | Loss on disposal of property, equipment | | | — | | | | — | | | | | | | | | | | | | | | | | | and other assets | | | 19 | | | | 181 | | | | (162 | ) | | | (89.5 | )% | | | 0.0 | % | | | 0.1 | % | | | | | | | | | | | | | | | | | | | | (Loss) Income from operations | | | (22,509 | ) | | | 13,045 | | | | (35,554 | ) | | | (272.5 | )% | | | (8.7 | )% | | | 5.0 | % | Other income (expenses): | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense | | | (2,207 | ) | | | (2,678 | ) | | | 471 | | | | 17.6 | % | | | (0.8 | )% | | | (1.0 | )% | Loss on early extinguishment of debt | | | — | | | | (6,702 | ) | | | 6,702 | | | | 100.0 | % | | | — | | | | (2.6 | )% | Interest and other income | | | 93 | | | | 172 | | | | (79 | ) | | | (45.9 | )% | | | 0.0 | % | | | 0.1 | % | Loss on note receiveable | | | (1,507 | ) | | | — | | | | (1,507 | ) | | | (100.0 | )% | | | (0.6 | )% | | | — | | Equity in net earnings of unconsolidated affiliates | | | 4,608 | | | | 4,779 | | | | (171 | ) | | | (3.6 | )% | | | 1.8 | % | | | 1.8 | % | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations before | | | | | | | | | | | | | | | | | | | | | | | | | income taxes | | | (21,522 | ) | | | 8,616 | | | | (30,138 | ) | | | (349.8 | )% | | | (8.3 | )% | | | 3.3 | % | Income tax (benefit) expense | | | (9,287 | ) | | | 1,115 | | | | (10,402 | ) | | | (932.9 | )% | | | (3.6 | )% | | | 0.4 | % | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations | | | (12,235 | ) | | | 7,501 | | | | (19,736 | ) | | | (263.1 | )% | | | (4.7 | )% | | | 2.9 | % | Income from discontinued operations, net of taxes | | | 1,733 | | | | 7,915 | | | | (6,182 | ) | | | (78.1 | )% | | | 0.6 | % | | | 3.1 | % | | | | | | | | | | | | | | | | | | | | Net (loss) income | | | (10,502 | ) | | | 15,416 | | | | (25,918 | ) | | | (168.1 | )% | | | (4.1 | )% | | | 6.0 | % | Less: Net income attributable to noncontrolling interest | | | (3,364 | ) | | | (7,588 | ) | | | (4,224 | ) | | | (55.7 | )% | | | (1.3 | )% | | | (3.0 | )% | | | | | | | | | | | | | | | | | | | | Net (loss) income attributable to MedCath Corporation | | $ | (13,866 | ) | | $ | 7,828 | | | $ | (21,694 | ) | | | (277.1 | )% | | | (5.4 | )% | | | 3.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts attributable to MedCath Corporation common stockholders: | | | | | | | | | | | | | | | | | | | | | | | | | (Loss) income from continuing operations, net of taxes | | $ | (15,091 | ) | | $ | 1,685 | | | $ | (16,776 | ) | | | (995.6 | )% | | | (5.8 | )% | | | 0.6 | % | Income from discontinued operations, net of taxes | | | 1,225 | | | | 6,143 | | | | (4,918 | ) | | | (80.1 | )% | | | 0.4 | % | | | 2.4 | % | | | | | | | | | | | | | | | | | | | | Net (loss) income | | $ | (13,866 | ) | | $ | 7,828 | | | $ | (21,694 | ) | | | (277.1 | )% | | | (5.4 | )% | | | 3.0 | % | | | | | | | | | | | | | | | | | | | |
HMMC, which is located in Kingman, AZ, opened in October 2009. For comparison purposes, the selected operating data below are presented on an actual basis and on a same facility basis. Same facility basis excludes HMMC from operations for the three and six months ended March 31, 2010. The following table presents selected operating data on a consolidated basis and a same facility basis for the periods indicated:
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| | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | | | | | 2010 Same | | | | | 2010 | | 2009 | | % Change | | Facility | | % Change | | Selected Operating Data (a): | | | | | | | | | | | | | | | | | | | | | Number of hospitals | | | 7 | | | | 6 | | | | | | | | 6 | | | | | | Licensed beds (b) | | | 600 | | | | 451 | | | | | | | | 530 | | | | | | Staffed and available beds (c) | | | 514 | | | | 404 | | | | | | | | 444 | | | | | | Admissions (d) | | | 12,813 | | | | 12,230 | | | | 4.8 | % | | | 12,127 | | | | (0.8 | )% | Adjusted admissions (e) | | | 18,685 | | | | 16,983 | | | | 10.0 | % | | | 17,405 | | | | 2.5 | % | Patient days (f) | | | 48,252 | | | | 47,039 | | | | 2.6 | % | | | 45,488 | | | | (3.3 | )% | Adjusted patient days (g) | | | 70,521 | | | | 65,452 | | | | 7.7 | % | | | 65,518 | | | | 0.1 | % | Average length of stay (days) (h) | | | 3.77 | | | | 3.85 | | | | (2.1 | )% | | | 3.75 | | | | (2.6 | )% | Occupancy (i) | | | 51.6 | % | | | 64.0 | % | | | | | | | 56.3 | % | | | | | Inpatients with a catheterization procedure (j) | | | 5,845 | | | | 6,229 | | | | (6.2 | )% | | | 5,714 | | | | (8.3 | )% | Inpatient surgical procedures (k) | | | 3,598 | | | | 3,576 | | | | 0.6 | % | | | 3,468 | | | | (3.0 | )% | Hospital net revenue (in thousands except percentages) | | $ | 249,789 | | | $ | 245,687 | | | | 1.7 | % | | $ | 237,938 | | | | (3.2 | )% |
| | | (a) | | Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements. | | (b) | | Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use. | | (c) | | Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period. | | (d) | | Admissions represent the number of patients admitted for inpatient treatment. | | (e) | | Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions. | | (f) | | Patient days represent the total number of days of care provided to inpatients. | | (g) | | Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days. | | (h) | | Average length of stay (days) represents the average number of days inpatients stay in our hospitals. | | (i) | | We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds. | | (j) | | Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period. | | (k) | | Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period. |
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Net Revenue.Our consolidated net revenue increased 0.8% or $2.2 million to $259.0 million for the six months ended March 31, 2010 from $256.8 million for the six months ended March 31, 2009. Hospital Division net revenue increased 1.9%, or $4.6 million, for the first six months of fiscal 2010 compared to the same period of fiscal 2009. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts. As a result, certain expenses once incurred by our MedCath Partners Division and reimbursed, are no longer being billed nor incurred by our MedCath Partners Division. There was a $1.5 million decrease in net revenue in our MedCath Partners Division as well as a $1.5 million reduction in expenses due to this billing change. Net revenue on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Net revenue | | $ | 247,116 | | | $ | 256,822 | | | $ | (9,706 | ) | | | (3.8 | )% | | | 100.0 | % | | | 100.0 | % |
Same facility inpatient net revenue was 72.5% of the Hospital Division’s same facility net patient revenue for the first six months of fiscal 2010 compared to approximately 74.7% for the same period of the prior year. Our total same facility inpatient cases were flat and inpatient net revenue was down 5.4% for the first six months of fiscal 2010 compared to the first six months of fiscal 2009. This decline was due primarily to a 5.2% reduction in our core cardiovascular related cases, resulting in a $15.4 million reduction in total same facility net patient revenue offset by an increase in our inpatient non-cardiovascular revenue. Outpatient net revenue increased 5.0% due to a 45.5% increase in outpatient AICD implants, pacer implants and EP studies/ablations net revenue. These procedures have increased due to the addition of physicians performing these procedures at certain of our hospitals. Emergency department net revenue increased 8.4% due to the mix of the procedures performed and due to the recent expansions at certain of our hospitals.
Net revenue for the first six months of fiscal 2010 included charity care deductions of $4.2 million compared to charity care deductions of $2.1 million for the first six months of fiscal 2009. The $2.1 million increase is the result of more uninsured patients applying and qualifying for charity care.
Personnel expense.Our consolidated personnel expense increased 4.0% to $91.5 million for the first six months ended March 31, 2010 from $88.0 million for the first six months ended March 31, 2009. Personnel expense on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Personnel expense | | $ | 83,977 | | | $ | 88,029 | | | $ | (4,052 | ) | | | (4.6 | )% | | | 34.0 | % | | | 34.3 | % |
The $4.1 million reduction in same facility personnel expense was primarily due to a $4.7 million reduction in salaries and wages, including temporary labor, offset by an increase in medical benefits expense. We continue to experience reductions in salaries and wages as we focus on aligning our expenses with our revenues. The total percentage of personnel expense is approximately the same for the first six months of fiscal 2010 and fiscal 2009. Our benefits expense increased as the result of an increase in the number of medical claims for the first six months of fiscal 2010 compared to the first six months of fiscal 2009.
Medical supplies expense.Our consolidated medical supplies expense increased 3.4% to $71.7 million for the first six months of fiscal 2010 from $69.4 million for the first six months of fiscal 2009. Medical supplies expense on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Medical supplies expense | | $ | 69,496 | | | $ | 69,357 | | | $ | 139 | | | | 0.2 | % | | | 28.1 | % | | | 27.0 | % |
Our medical supplies expense for the first six months of fiscal 2010 remained relatively flat compared to the first six months of fiscal 2009. During the first six months of fiscal 2010 we experienced lower volumes on procedures that have high net revenue per case, such as open heart procedures. We had a 10.1% reduction in open heart surgeries for the first six months of fiscal 2010 compared to the same period of the prior year. With less open heart net revenue, the percentage of medical supplies will increase as a percentage of net revenue.
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Bad debt expense.Our consolidated bad debt expense increased 22.9% to $22.6 million for the first six months of fiscal 2010 from $18.4 million for the first six months of fiscal 2009. As a percentage of net revenue, bad debt expense increased to 8.7% for the fix six months of fiscal 2010 as compared to 7.2% for the comparable period of fiscal 2009. Bad debt expense on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Bad debt expense | | $ | 20,782 | | | $ | 18,392 | | | $ | 2,390 | | | | 13.0 | % | | | 8.4 | % | | | 7.2 | % |
Our total same facility uncompensated care including charity care and bad debt expense was 10.4% of total same facility net patient hospital revenue for the first six months of fiscal 2010 compared to 8.3% of total same facility net patient revenue for the first six months of fiscal 2009. The total number of patients which applied and qualified for charity care increased during first quarter of fiscal 2010 compared to the first quarter of fiscal 2009. We reported $2.12011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, more charity deductions to net revenue during the first six monthspartially offset by an $11.1 million loss on early termination of fiscal 2010 when compared to the first six months of fiscal 2009. Bad debt expense alone (not including charity care) increased $2.4 million for the first six months quarter of fiscal 2010 compared to the same periodat one of the prior year. This is attributable to a $3.2 million increase in self-pay revenue for the first six months of fiscal 2010 compared to the same periodfacilities. The significant components of the prior year offset by improved collectiongains recognized are a $35.7 million gain and a $34.3 million gain on accounts receivable during fiscal 2010.
Other operating expenses.Our consolidated other operating expenses increased 8.9% to $59.4 million for the first six months of fiscal 2010 from $54.5 million for the first six months of fiscal 2009. Other operating expense on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Other operating expense | | $ | 53,984 | | | $ | 54,502 | | | $ | (518 | ) | | | (1.0 | )% | | | 21.8 | % | | | 21.2 | % |
Our same facility other operating expense decreased $0.5 million for the first six months compared to the same period of the prior year. Our legal and professional fees which were $1.3 million higher for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 due to the fees incurred related to the pending sale of Heart Hospital of Austin and fees incurred related to our strategic initiatives involving the sale of the Company or individual assets of the Company. Our corporate benefits expense was approximately $0.7 million higher due to an increase in medical claims during the first six months of fiscal 2010 compared to the same period of the prior year. We incurred and additional $0.5 million of maintenance expense during the first six months of fiscal 2010 compared to the first six months of fiscal 2009 as our newer facilities begin to age. These increases were offset by a $1.7 million reduction in our medical malpractice insurance expense and a $0.9 million reduction in our corporate bonus expense. Our medical malpractice expense was higher during the first six months of fiscal 2009 due to specific high dollar settlements at certain of our hospitals. Our corporate bonuses are accrued based on management’s estimate of the attainment of operating performance and/or personal goals. The reduction during the first six months of fiscal 2010 reflects management’s adjustment to the accrual.
Interest expense.Interest expense decreased $0.5 million or 17.6% to $2.2 million for the first six months of fiscal 2010 from $2.7 million for the first six months of fiscal 2009. The $0.5 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt and interest rates on our outstanding debt.
Loss on note receivable.Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to our determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note.
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Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in two unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division.
Net earnings of unconsolidated affiliates in which we have a noncontrolling interest decreased during the first six months of fiscal 2010 to $4.6 million from $4.8 million for the same period of the prior year. The $0.2 million decrease was due to a medical office venture within corporate and other, and an impairment charge of $0.1 million within our MedCath Partners Division related to the anticipated sale of its investment in Tri-County.
Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries decreased to $3.4 million for the first six months of fiscal 2010 from $7.6 million for the comparable period of fiscal 2009. Net income attributable to noncontrolling interest on a same facility basis was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended March 31, | | | (in thousands except percentages) | | | | | | | | | | | Increase/(Decrease) | | % of Net Revenue | | | 2010 | | 2009 | | $ | | % | | 2010 | | 2009 | Net income attributable to noncontrolling interest | | $ | 5,120 | | | $ | 7,588 | | | $ | (2,468 | ) | | | (32.5 | )% | | | 2.1 | % | | | 3.0 | % |
On a same facility basis, net income attributable to noncontrolling interest decreased $2.5 million due to a reduction in net income and an increase in our disproportionate share of losses from certain of our facilities.
We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, seeCritical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
Income tax (benefit) expense.Income tax benefit was $9.3 million for the first six months of fiscal 2010 compared to an expense of $1.1 million for the first six months of fiscal 2009, which represents an effective tax rate of approximately 38.1% and 39.8% for the respective periods. The higher income tax rate for the six months of fiscal 2009 was the result of the impact of higher nondeductible permanent differences.
Income from discontinued operations, net of taxes.Income from discontinued operations, net of taxes, reflects the results of DHH, HHA, Cape Cod, and Sun City for the first six months of fiscal 2010 and fiscal 2009. Discontinued operations decreased to income of $1.7 million, net of taxes for the first six months of fiscal 2010 from income of $7.9 million, net of taxes, for the comparable period of fiscal 2009. Income from discontinued operations during the first six months of fiscal 2010 reflected the operations of HHA and TexSan Heart Hospital, respectively. In addition, pretax loss from operating activities of the related continued activities associated with previously divested facilities, which primarily related to accounts receivable and medical malpractice reserves. Income from discontinued operations from the same period of fiscal 2009 reflected the operating income from HHA, Sun City, Cape Cod, and the gain from the divestiture of Cape Cod, which was sold during the first quarter of fiscal 2009, offset by losses at DHH.businesses decreased $1.0 million.
Liquidity and Capital Resources Working Capital and Cash Flow Activities. Our consolidated working capital from continuing operations was $43.7 million at March 31, 2010 and $35.1 million at September 30, 2009. Consolidated working capital from continuing operations increased $8.6 million primarily due to the increase in patient accounts receivable and as a result of being in an income tax receivable position of $0.7 million due to our net loss for the first six months of fiscal 2010 versus an income tax payable position of $0.3 million as of September 30, 2009. At March 31, 2010, we continue to carry a reserve of $9.8 million for outlier payments received in 2004, which is recorded in current liabilities of discontinued operations.
Cash provided by continuing operations from operating activities was $15.1 million for the first six months of fiscal 2010 compared to $31.8 million for the comparable period of fiscal 2009. The decrease of $16.7 million in cash provided by continuing operations from operating activities was due to an overall $8.4$0.5 million decrease in cash generated from continuing operations as a result of the decrease in our net income duringfor the first sixthree months of fiscal 20102011 compared to $2.0 million for the comparable period of fiscal 2009. Cash from continuing operations was further decreased by an increase in accounts receivable of $4.5 million, primarily related to the opening of HMMC, an increase in payments of $4.4 million related to the timing of payments associated with accounts payable, and a $1.1 million increase in cash payments related to the timing of prepaid obligations, such as yearly insurance premiums. These increases in cash payments were offset by a $1.7 million reduction in cash payments associated with the purchases of and cost of medical supplies.2010.
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Our investing activities from continuing operations usedprovided net cash of $14.3$32.1 million for the first sixthree months of fiscal 20102011 compared to $49.5a use of cash of $7.5 million for the comparable period of fiscal 2009. The total cash used2010. Such increase is primarily due to the net proceeds of $31.9 million for capital expenditures decreased by $35.2 millionthe disposition of the Company’s interest in Avera Heart Hospital of South Dakota and Southwest Arizona Heart and Vascular LLC during the first six monthsquarter of fiscal 20102011. In addition, the Company experienced a decrease of $7.4 million in cash paid for property and equipment in the first quarter of fiscal 2011 as compared to the comparablesame period in fiscal 2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of fiscal 2009, a direct result of the completion of the expansion of our hospital facilities and the opening of our new acute care hospitalHualapai Mountain Medical Center, which opened in Kingman, Arizona.October 2009. Our financing activities from continuing operations used net cash of $18.4$12.9 million for the first sixthree months of fiscal 20102011 compared to $41.6$12.3 million for the comparable period of fiscal 2009.2010. Cash used in financing activities decreased $23.2to repay long-term debt and obligations under capital leases increased $2.8 million for the first sixthree months of fiscal 20102011 as compared to the comparable period of fiscal 2009. The decrease2010. This increase was due to the repayment of our 9 7/8% Senior Notes during December 2008partially offset by a $7.8decrease of $2.4 million payment on our Credit Facility duringin distributions to noncontrolling shareholders. Subsequent to the end of the first six monthsquarter of fiscal 2010.2011, the Company made an additional $20.6 million prepayment of its outstanding balance under the Amended Credit Facility. Capital Expenditures.Cash paid for property and equipment was $14.9$0.2 million and $50.1$7.5 million for the first sixthree months of fiscal years 20102011 and 2009,2010, respectively. Of the $14.9$7.5 million of cash paid for property and equipment during the first sixthree months of fiscal 2010, $6.8$3.7 million related to maintenance capital expenditures. The $50.1 million cash paid for property and equipment during the first six months of fiscal 2009 primarily related to the development of HMMC and the expansion projects at two of our existing hospitals,Hualapai Mountain Medical Center, which began during fiscal 2007. All expansion projects were substantially complete during fiscal 2009, and our hospital in Kingman, Arizona opened in October 2009. Obligations and Availability of Financing.At MarchDecember 31, 2010, we had $86.6$67.4 million of outstanding long-term debt and obligations under capital leases, of which $18.1$61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $72.2$58.9 million. The remaining outstanding long-term debt and obligationsobligation under capital leases of $14.4$8.5 million was due to various lenders to our hospitals. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is $85.0$59.5 million which wasis reduced by outstanding letters of credit totaling $1.7 million as of MarchDecember 31, 2010. As previously noted, on January 5, 2011 the Company made a principal prepayment of $20.6 million of the amounts outstanding under the Amended Credit Facility. Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At MarchHowever, as noted inLiquidity and Capital Resourcesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, the Company was not required to test the fixed charge coverage ratio at December 31, 2010 and September 30, 2009, TexSAn Heart Hospital was in violation of financial covenants which govern its equipment loans outstanding. Accordingly,will retest such compliance at the total outstanding balance for these loans of $4.4 millionfiscal quarter ended March 31, 2011 and $6.1 million, respectively, has been included in the current portion of long-term debt and obligations under capital leases in our consolidated balance sheets. The covenant violations did not result in any other non-compliance related to the covenants governing our other outstanding debt arrangements.subsequent fiscal quarters. At MarchDecember 31, 2010, we guaranteed either all or a portion of the obligations of certain of our subsidiary hospitals for equipment and other notes payable.equipment. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from either the hospitals or the physician investors. Access to available borrowings under our Amended Credit Facility is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the Amended Credit Facility. Deterioration in the Company’s operating results could result in failure to maintain compliance with these covenants, which would restrict or eliminate access to available funds. We believe that internally generated cash flows from operations and available borrowings under our Credit Facilityasset sales will be sufficient to finance our business plan,strategic plans, capital expenditures and our working capital requirements for the next 12 to 18 months. Repayment of the outstanding balance under our Amended Credit Facility prior to its November 2011 maturity date will be dependent on existing cash, cash flow from operations and cash from asset sales. On January 5, 2011, the Company prepaid $20.6 million of the outstanding balance using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million at that date. 24
Intercompany Financing Arrangements.We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available. Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at rates ranging from 4.87% to 8.43%. The weighted average interest rate for the intercompany equipment loans at December 31, 2010 was 7.09%. We typically receive a fee from the minority partners in the subsidiary hospitals as further consideration for providing these intercompany real estate and equipment loans. We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to our equity investment in the hospital venture. The estimated net realizable value of intercompany notes outstanding with the Company’s subsidiaries in continuing operations was $153.2 million and $149.8 million as of September 30, 2010 and December 31, 2010, respectively. All intercompany notes are eliminated in consolidation and are not reflected on the Company’s consolidated balance sheet. Retained Obligations Subsequent to Disposition.Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. As the Company’s hospitals are organized as partnerships, upon disposition of the related operations, assets and certain liabilities, the partnerships are responsible for the resolution of outstanding payables, remaining obligations, including those related to cost reports, medical malpractice and other obligations and wind down of the respective tax filings of the partnership. The partnerships are also responsible for any unknown liabilities that may arise. The Company has reported all known obligations in its consolidated balance sheets as of December 31, 2010 and September 30, 2010. However, as the ultimate resolution of the outstanding payables and obligations may take in excess of one year, our estimates may prove incorrect and result in the Company paying amounts in excess of those recorded at the respective balance sheet date. Retained Cash Balance.At December 31, 2010 the Company had $158.5 million in cash related to continuing operations and $45.4 million in cash related to discontinued operations. The Company expects to retain approximately $156.4 million of the $158.5 million cash in continuing operations after it distributes cash from certain hospital partnerships to itself and the minority owners of those partnerships. As of December 31, 2010 the Company’s estimate of total potential cash distributions to the Company from discontinued operations after it distributes cash from the respective hospital partnerships is approximately $25.7 million after taking into account distributions to minority owners, the liquidation of all assets and the settlement of all known liabilities, but does not take into account any unknown contingent liabilities related to the discontinued operations. The estimate of total cash distributions to the Company may change as it updates its estimates. There can be no assurance when the distributions to the Company from discontinued operations may take place, but it may be over an extended period of time. Any cash retained will be used to fund working capital and repay outstanding debt, which is due in full in November 2011. Disclosure About Critical Accounting Policies Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, 2009.2010. During the first sixthree months of fiscal 20102011 we adopted a new accounting policiespolicy as discussed in Note 2 —Recent Accounting Pronouncementsto our consolidated financial statements included herein.statements. The adoption of thesethis new accounting policiespolicy did not have a material impact on our consolidated financial statements. Forward-Looking Statements Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light 25
of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, 2009 as may be updated by our subsequent filings with the SEC,2010, before making an investment decision with respect to our equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://www.medcath.com. 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk We maintain a policy for managing risk related to exposure to variability in interest rates, commodity prices, and other relevant market rates and prices which includes considering 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 our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. The Company disposed of its minority interest in a hospital that maintained a cash flow hedge on October 1, 2010. As a result, the Company does not have outstanding any derivatives at December 31, 2010. There was no material change in our policy for managing risk related to variability in interest rates, commodity prices, other relevant market rates and prices during the first sixthree months of 2010.2011. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 20092010 for further discussions about market risk. Interest Rate Risk Our Amended Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our Credit Facility was $72.2$58.9 million at MarchDecember 31, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $0.4$0.1 million during the sixthree month period ended MarchDecember 31, 2010.2011. Item 4. Controls and Procedures The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of MarchDecember 31, 2010, that the Company’s disclosure controls and procedures were effective as of MarchDecember 31, 2010 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner, and includes controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes during the fiscal quarter to the Company’s internal controls over financial reporting that materially affected or is reasonably likely to materially affect, the Company’s internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. See Note 7 —Contingencies and Commitmentsto the consolidated financial statements included in this report. Item 1A. Risk Factors Information concerning certain risks and uncertainties appears under the heading “Forward-Looking Statements” in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2009.2010. You should carefully consider these risks and uncertainties before making an investment decision with respect to our debt and equity securities. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results. During the period covered by this report, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 20092010 or filings subsequently made with the Securities and Exchange Commission, except for the addition of the following risk factor: Impairment of long-lived assets could have a material adverse effect on our consolidated financial statements
Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. 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 our strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. If impairment is determined to be present, the resulting non-cash impairment charges could be material to our consolidated financial statements.
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Health Care Reform
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, followed by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010 (collectively referred to as the “Health Reform Laws”). The Health Reform Laws include many provisions that will affect our Company, although given the complexity of the laws, the full impact on the Company and its operations is not known at this time. In addition, implementing regulations have not been issued which will also have a bearing on how these changes impact the Company. Some of the provisions in the Health Reform Laws are effective immediately while others will not become effective for several years.
Significantly, the Health Reform Laws revised the “whole hospital” exception to the Stark Law by adding additional requirements for hospitals to qualify for the exception. Because all of our hospitals have physician ownership and therefore must comply with the “whole hospital” exception, these additional requirements will apply to all of our hospitals. These requirements include: additional reporting and disclosure obligations; prohibitions on the increase in the percentage of physician ownership over that in place on the date of enactment; prohibitions on expanding the number of beds, operating rooms, or procedure rooms over the number in place as of the date of enactment, specifications for physician investment; and patient safety measures. The limitations on expansion and additional investment by physician owners or investors were effective as to our hospitals as of March 23, 2010.
The Health Reforms Laws also established a new Independent Payment Advisory Board (the “IPAB”) to develop and submit proposals to Congress to reduce Medicare spending. The IPAB could have a significant impact on Medicare spending, which in turn would affect Medicare payments to our hospitals and other health care facilities.
Some of the other provisions contained in the Health Reform Laws may have a positive impact on the Company, such as the expansion in the number of individuals with health insurance and the expansion of Medicaid eligibility. The Health Reform Laws also tie payment to quality measures by establishing a value-based purchasing system and adjusting hospital payment rates based on hospital-acquired conditions and hospital readmissions. Beginning in 2013, hospitals that satisfy certain performance standards will receive increased payments for discharges during the following fiscal year. We believe that if we continue to make quality of care improvements, this may have the effect of reducing costs, increasing payments from Medicare for our services, and increasing physician and patient satisfaction.
The Health Reform Laws also include enhanced government enforcement tools to identify and impose remedies for fraud, which may adversely impact entities in the healthcare industry, including our Company.
In addition, certain provisions of the Health Reform Laws authorize voluntary demonstration projects beginning not later than 2013 for bundling payments for acute, inpatient hospital services, physician services, and post acute services for episodes of hospital care. In addition, beginning no later than January 1, 2012, the Health Reform Laws allows providers organized as accountable care organizations that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program.
The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its operations.Commission.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 27, 2001, we completed an initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC on July 23, 2001. We expect to use the remaining proceeds of approximately $13.8 million from the offering to fund development activities, working capital requirements and other corporate purposes. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the allocation of the net proceeds from the offering. Pending this application, we will continue to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds or short-term interest bearing, investment-grade securities.
The Board of Directors approved a stock repurchase program of up to $59.0 million in August 2007, which was announced November 2007. Stock purchases can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of the stock repurchase program, the Company has purchased 1,885,461 shares of common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be repurchased per the approved stock repurchase program. No shares were repurchased during the six month period ended March 31, 2010.
See Note 6 to our annual financial statements in our Annual Report on Form 10-K for the year ended September 30, 2009 for a description of restrictions on payments of dividends and stock repurchases.
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Item 6. Exhibits | | | Exhibit No. | | Description | 10.1 | | | 2.1 | | Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1) | | | | 2.2 | | Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLPLLC and Heart Hospital IV, L.P. (1) |
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| | | Exhibit No. | | Description | | | | 2.3 | | Asset Purchase Agreement dated as of November 5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2) | | | | 3.1 | | Amended and Restated Bylaws of MedCath Corporation(3) | | | | 10.1* | | Amendment to Employment Agreement dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French | | | | 10.2* | | Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker | | | | 10.3* | | Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker | | | | 10.4* | | Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt | | | | 10.5* | | Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4) | | | | 10.6 | | Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3) | | | | 10.7* | | Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5) | | | | 31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | * | | Indicates a management contract or compensatory plan or agreement. | | (1) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010. | | (2) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010. | | (3) | | Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010. | | (4) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010. | | (5) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010. |
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | MEDCATH CORPORATION | | Dated: May 10, 2010February 9, 2011 | By: | /s/ O. EDWIN FRENCH | | | | O. Edwin French | | | | President and Chief Executive Officer (principal executive officer) | | | | | | | By: | /s/ JAMES A. PARKER | | | | James A. Parker | | | | Executive Vice President and Chief Financial Officer
(principal (principal financial officer) | | | | | | | By: | /s/ LORA RAMSEY | | | | Lora Ramsey | | | | Vice President and Controller (principal accounting officer) | | |
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INDEX TO EXHIBITS | | | Exhibit No. | | Description | 10.1 | | | 2.1 | | Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1) | | | | 2.2 | | Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLPLLC and Heart Hospital IV, L.P. (1) | | | | 2.3 | | Asset Purchase Agreement dated as of November 5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2) | | | | 3.1 | | Amended and Restated Bylaws of MedCath Corporation(3) | | | | 10.1* | | Amendment to Employment Agreement dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French | | | | 10.2* | | Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker | | | | 10.3* | | Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker | | | | 10.4* | | Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt | | | | 10.5* | | Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4) | | | | 10.6 | | Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3) | | | | 10.7* | | Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5) | | | | 31.1 | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 31.2 | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | * | | Indicates a management contract or compensatory plan or agreement. | | (1) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010. | | (2) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010. | | (3) | | Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010. | | (4) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010. | | (5) | | Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010. |
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