UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended December 31, ~~2009~~2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		56-2248952
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)		~~56-2248952~~ ~~(IRS Employer Identification No.)~~

10720 Sikes Place, Suite 300
Charlotte, North Carolina 28277
(Address of principal executive offices, including zip code)

(704) 815-7700
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yeso Nooþ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero		Smaller reporting companyo
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~ o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of February ~~5, 2010,~~4, 2011, there were ~~22,436,809~~20,308,070 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MEDCATH CORPORATION

~~MEDCATH CORPORATION~~
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	December 31,			September 30,			December 31,			September 30,
	2009			2009			2010			2010

Current assets:
Cash and cash equivalents	$	22,760		$	32,014		$	158,475		$	33,141
Accounts receivable, net		72,596			70,410			44,795			43,811
Income tax receivable		1,037			—			—			6,188
Medical supplies		18,929			18,261			10,644			10,550
Deferred income tax assets		12,069			12,201			7,815			13,247
Prepaid expenses and other current assets		15,313			13,969			12,902			13,453
Current assets of discontinued operations		11,942			30,011			57,345			47,920

Total current assets		154,646			176,866			291,976			168,310
Property and equipment, net		383,850			385,926			176,885			182,222
Investments in affiliates		7,931			14,055
Other assets		11,658			13,601			11,652			24,716
Non-current assets of discontinued operations								1,232			119,290

Total assets	$	558,085		$	590,448		$	481,745		$	494,538


Current liabilities:
Accounts payable	$	39,562		$	40,979		$	19,957		$	15,716
Income tax payable		—			642			14,316			—
Accrued compensation and benefits		16,136			18,744			11,705			16,418
Other accrued liabilities		20,975			24,860			21,073			16,663
Current portion of long-term debt and obligations under capital leases		18,279			21,243			61,573			16,672
Current liabilities of discontinued operations		9,907			10,165			17,014			35,044

Total current liabilities		104,859			116,633			145,638			100,513
Long-term debt		99,058			101,871			—			52,500
Obligations under capital leases		4,861			4,647			5,822			6,500
Deferred income tax liabilities		14,069			13,874
Other long-term obligations		7,436			8,893			3,883			5,053
Long-term liabilities of discontinued operations								—			35,968

Total liabilities		230,283			245,918			155,343			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interests in equity of consolidated subsidiaries		4,297			7,448
Redeemable noncontrolling interest in equity of consolidated subsidiaries								5,812			11,534

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued		—			—			—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,436,809 issued and 20,482,448 outstanding at December 31, 2009 22,104,917 issued and 20,150,556 outstanding at September 30, 2009		216			216
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,262,431 issued and 20,308,070 outstanding at December 31, 2010 22,423,666 issued and 20,469,305 outstanding at September 30, 2010								216			216
Paid-in capital		455,273			455,259			457,952			457,725
Accumulated deficit		(94,076	)		(91,420	)		(102,752	)		(139,791	)
Accumulated other comprehensive loss		(304	)		(360	)		—			(444	)
Treasury stock, at cost; 1,954,361 shares at December 31, 2009 1,945,361 shares at September 30, 2009		(44,797	)		(44,797	)
Treasury stock, at cost; 1,945,361 shares at December 31, 2010 and September 30, 2010								(44,797	)		(44,797	)

Total MedCath Corporation stockholders’ equity		316,312			318,898			310,619			272,909
Noncontrolling interests		7,193			18,184
Noncontrolling interest								9,971			9,561

Total equity		323,505			337,082			320,590			282,470

Total liabilities and equity	$	558,085		$	590,448		$	481,745		$	494,538

~~MEDCATH CORPORATION~~
~~CONSOLIDATED STATEMENTS OF OPERATIONS~~
~~(In thousands, except per share data)~~
~~(Unaudited)~~

Three Months Ended December 31,
2009 2008

Net revenue $ 147,260 $ 150,245
Operating expenses:
Personnel expense 51,821 50,169
Medical supplies expense 41,859 41,642
Bad debt expense 11,925 11,429
Other operating expenses 34,452 31,902
Pre-opening expenses 866 207
Depreciation 9,035 7,801
Amortization 8 30
Loss on disposal of property, equipment and other assets 137 73

Total operating expenses 150,103 143,253

(Loss) Income from operations (2,843 ) 6,992
Other income (expenses):
Interest expense (1,813 ) (2,857 )
Loss on early extinguishment of debt — (6,961 )
Interest and other income 74 101
Equity in net earnings of unconsolidated affiliates 1,516 2,065

Total other expense, net (223 ) (7,652 )

Loss from continuing operations before income taxes (3,066 ) (660 )
Income tax benefit (1,539 ) (1,108 )

(Loss) income from continuing operations (1,527 ) 448
(Loss) income from discontinued operations, net of taxes (288 ) 4,921

Net (loss) income (1,815 ) 5,369
Less: Net income attributable to noncontrolling interests (841 ) (3,123 )

Net (loss) income attributable to MedCath Corporation $ (2,656 ) $ 2,246

Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes $ (2,511 ) $ (1,915 )
(Loss) income from discontinued operations, net of taxes (145 ) 4,161

Net (loss) income $ (2,656 ) $ 2,246

(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath
Corporation common stockholders $ (0.13 ) $ (0.10 )
Income from discontinued operations attributable to MedCath
Corporation common stockholders — 0.21

(Loss) earnings per share, basic $ (0.13 ) $ 0.11

(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath
Corporation common stockholders $ (0.13 ) $ (0.10 )
Income from discontinued operations attributable to MedCath
Corporation common stockholders — 0.21

(Loss) earnings per share, diluted $ (0.13 ) $ 0.11

Weighted average number of shares, basic 19,743 19,599
Dilutive effect of stock options and restricted stock — —

Weighted average number of shares, diluted 19,743 19,599

~~See notes to unaudited consolidated financial statements.~~

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended December 31,
	2010			2009

Net revenue	$	88,900		$	87,830
Operating expenses:
Personnel expense		32,454			31,636
Medical supplies expense		19,222			22,107
Bad debt expense		9,709			7,506
Other operating expenses		24,116			22,344
Pre-opening expenses		—			866
Depreciation		4,887			5,938
Loss on disposal of property, equipment and other assets		93			96

Total operating expenses		90,481			90,493

Loss from operations		(1,581	)		(2,663	)
Other income (expenses):
Interest expense		(1,082	)		(945	)
Interest and other income		489			70
Gain on sale of unconsolidated investees		15,391			—
Equity in net earnings of unconsolidated affiliates		602			1,516

Total other income (expense), net		15,400			641

Income (loss) from continuing operations before income taxes		13,819			(2,022	)
Income tax expense (benefit)		4,482			(1,337	)

Income (loss) from continuing operations		9,337			(685	)
Income (loss) from discontinued operations, net of taxes		39,128			(1,130	)

Net income (loss)		48,465			(1,815	)
Less: Net income attributable to noncontrolling interest		(11,426	)		(841	)

Net income (loss) attributable to MedCath Corporation	$	37,039		$	(2,656	)


Amounts attributable to MedCath Corporation common stockholders:
Income (loss) from continuing operations, net of taxes	$	7,162		$	(1,902	)
Income (loss) from discontinued operations, net of taxes		29,877			(754	)

Net income (loss)	$	37,039		$	(2,656	)


Earnings (loss) per share, basic
Income (loss) from continuing operations attributable to MedCath Corporation common stockholders	$	0.36		$	(0.09	)
Income (loss) from discontinued operations attributable to MedCath Corporation common stockholders		1.50			(0.04	)

Earnings (loss) per share, basic	$	1.86		$	(0.13	)


Earnings (loss) per share, diluted
Income (loss) from continuing operations attributable to MedCath Corporation common stockholders	$	0.36		$	(0.09	)
Income (loss) from discontinued operations attributable to MedCath Corporation common stockholders		1.50			(0.04	)

Earnings (loss) per share, diluted	$	1.86		$	(0.13	)


Weighted average number of shares, basic		19,943			19,743
Dilutive effect of stock options and restricted stock		4			—

Weighted average number of shares, diluted		19,947			19,743

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended December 31,						Three Months Ended December 31,
	2009			2008			2010			2009
Net (loss) income	$	(1,815	)	$	5,369
Net income (loss)							$	48,465		$	(1,815	)
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (income) from discontinued operations, net of taxes		288			(4,921	)
(Income) loss from discontinued operations, net of taxes								(39,128	)		1,130
Bad debt expense		11,925			11,429			9,709			7,506
Depreciation		9,035			7,801			4,887			5,938
Amortization		8			30
Gain on sale of unconsolidated investees								(15,391	)		—
Loss on disposal of property, equipment and other assets		137			73			93			96
Share-based compensation expense		608			998			1,932			608
Loss on early extinguishment of debt		—			6,961
Amortization of loan acquisition costs		252			279			313			252
Equity in earnings of unconsolidated affiliates, net of distributions received		6,217			4,018			(84	)		6,217
Deferred income taxes		(103	)		(75	)		1,085			(103	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(14,111	)		(13,498	)		(10,693	)		(12,106	)
Medical supplies		(668	)		(2,321	)		(94	)		(73	)
Prepaid and other assets		(3,399	)		864			2,266			(3,088	)
Accounts payable and accrued liabilities		(4,496	)		1,847			(2,825	)		(2,523	)

Net cash provided by operating activities of continuing operations		3,878			18,854			535			2,039
Net cash used in operating activities of discontinued operations		(343	)		(1,729	)
Net cash (used in) provided by operating activities of discontinued operations								(5,131	)		1,496

Net cash provided by operating activities		3,535			17,125
Net cash (used in) provided by operating activities								(4,596	)		3,535

Investing activities:
Purchases of property and equipment		(9,310	)		(30,056	)		(157	)		(7,532	)
Proceeds from sale of property and equipment		74			119			418			70
Proceeds from sale of unconsolidated affiliates								31,851			—

Net cash used in investing activities of continuing operations		(9,236	)		(29,937	)
Net cash provided by investing activities of discontinued operations		—			6,909
Net cash provided by (used in) investing activities of continuing operations								32,112			(7,462	)
Net cash provided by (used in) investing activities of discontinued operations								194,616			(1,774	)

Net cash used in investing activities		(9,236	)		(23,028	)
Net cash provided by (used in) investing activities								226,728			(9,236	)

Financing activities:
Proceeds from issuance of long-term debt		—			83,662
Repayments of long-term debt		(5,800	)		(108,194	)		(7,662	)		(5,000	)
Repayments of obligations under capital leases		(506	)		(264	)		(614	)		(454	)
Distributions to noncontrolling interests		(8,218	)		(9,424	)
Investment by noncontrolling interests		153			—
Distributions to noncontrolling interest								(4,504	)		(6,924	)
Investment by noncontrolling interest								—			153
Sale of equity interest in subsidiary		140			—			—			140
Tax withholding of vested restricted stock awards		(253	)		—			(153	)		(253	)

Net cash used in financing activities of continuing operations		(14,484	)		(34,220	)		(12,933	)		(12,338	)
Net cash used in financing activities of discontinued operations		(6,937	)		(2,305	)
Net cash provided by financing activities of discontinued operations								(52,327	)		(9,083	)

Net cash used in financing activities		(21,421	)		(36,525	)		(65,260	)		(21,421	)


Net decrease in cash and cash equivalents		(27,122	)		(42,428	)
Net increase (decrease) in cash and cash equivalents								156,872			(27,122	)
Cash and cash equivalents:
Beginning of period		61,701			112,068			47,030			61,701

End of period	$	34,579		$	69,640		$	203,902		$	34,579


Cash and cash equivalents of continuing operations		22,760			56,912			158,475			20,249
Cash and cash equivalents of discontinued operations		11,819			12,728			45,427			14,330

MEDCATH CORPORATION

~~MEDCATH CORPORATION~~
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

1. Business and Basis of Presentation

MedCath Corporation (the “Company”) primarily focuses on providing high acuity services, ~~predominantly~~including the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with ~~physicians, most~~physicians. As of ~~whom are cardiologists~~December 31, 2010, the Company had ownership interests in and ~~cardiovascular surgeons. While each~~operated six hospitals, including five in which the Company owned a majority interest.

As noted below under “Our Strategic Options Review Process”during the quarter ended December 31, 2010, the Company sold three of its majority owned hospitals that were classified as discontinued operations and its equity interest in one of its minority owned hospitals. As a result, the Company currently owns interests in six hospitals. Each of the Company’s majority-owned hospitals ~~(collectively, the “Hospital Division”)~~ is a freestanding, licensed ~~as a~~ general acute care hospital ~~the Company focuses on serving the unique needs~~that provides a wide range of ~~patients suffering from cardiovascular disease. As of December 31, 2009, the Company and its physician partners have an ownership interest in and operate ten hospitals in seven states,~~health services with a ~~total~~majority focus on cardiovascular care. Each of ~~825~~the Company’s hospitals has a 24-hour emergency room staffed by emergency department physicians. The Company’s six hospitals that currently comprise continuing operations have 533 licensed ~~beds.~~

~~In addition to its hospitals, the Company provides cardiovascular care services~~beds and are located in ~~diagnostic~~five states: Arkansas, California, Louisiana, New Mexico, and therapeutic facilities in various locations and through mobile cardiac catheterization laboratories and also provides management services to non owned facilities (the “MedCath Partners Division”). The Company also provides consulting and management services tailored primarily to cardiologists and cardiovascular surgeons, which is included in corporate and other.Texas.

The Company accounts for all but ~~two~~one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling ~~interests~~interest in ~~the Avera Heart Hospital of South Dakota and~~ Harlingen Medical Center as of December 31, ~~2009.~~2010. Therefore, the Company is unable to consolidate ~~these hospitals’~~this hospital’s results of operations and financial position, but rather is required to account for its noncontrolling interest in this hospital as an equity-method investment.

In addition to the hospitals, the Company currently owns and/or manages seven cardiac diagnostic and therapeutic facilities. Six of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The Company also operates two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. The Company refers to its diagnostics division as “MedCath Partners.”

During fiscal 2010 and fiscal 2011, the Company entered into definitive agreements to sell its interests in ~~these hospitals as equity method investments.~~

~~Basis~~Arizona Heart Hospital (“AzHH”), Heart Hospital of ~~Presentation~~~~— Effective~~Austin (“HHA”) and TexSan Heart Hospital (“TexSan”) whose assets, liabilities, and operations are included within discontinued operations. AzHH, HHA and TexSan were sold on October 1, ~~2009, the Company adopted a new accounting standard which establishes accounting~~2010, November 1, 2010 and ~~reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount~~December 31, 2010, respectively. The results of ~~net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest, and the valuation~~operations of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This new accounting standard generally requires the Company to clearly identify and present ownership interests in subsidiaries held by parties other than the Company in the consolidated financial statements within the equity section but separate from the Company’s equity. However, in instances in which certain redemption features thatthese entities are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted forreported as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectivelydiscontinued operations for all periods presented. See Note 3.

Our Strategic Options Review Process

~~Upon the occurrence of certain fundamental regulatory changes,~~On March 1, 2010, the Company ~~could be obligated, under~~announced that its Board of Directors had formed a Strategic Options Committee to consider the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the Company’s subsidiaries. While the Company believes that the likelihood of a change in current law that would trigger such purchases was remote as of December 31, 2009, the occurrence of such regulatory changes is outside the control of the Company. As a result, these noncontrolling interests that are subject to this redemption feature are not included as partsale either of the Company’s equity or the sale of its individual hospitals and ~~are carried~~other assets. The Company retained Navigant Capital Advisors as ~~redeemable noncontrolling interests~~its financial advisor to assist in ~~equity~~this process. Since announcing the exploration of ~~consolidated subsidiaries~~strategic alternatives on ~~the Company’s consolidated balance sheets.~~

Profits and losses are allocated to the noncontrolling interest in the Company’s subsidiaries in proportion to their ownership percentages and reflected in the aggregate as net income attributable to noncontrolling interests. The physician partners of the Company’s subsidiaries typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each physician partner shares in the pre-tax earnings of the subsidiary in which it is a partner. Accordingly, the income or loss attributable to noncontrolling interests in each of the Company’s subsidiaries are generally determined on a pre-tax basis. In accordance with this new accounting standard, total net income attributable to noncontrolling interests are presented after net (loss) income. However,March 1, 2010, the Company must consider the impact of the net income attributable to noncontrolling interests or net (loss) income before income taxes in order to determine the amount of pre-tax earnings on which the Company must determine its tax expense.has completed several transactions, including:

	•		The disposition of AzHH in which the Company 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.

	•		The disposition of the Company’s 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.

	•		The disposition of HHA in which the Company and the 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.

	•		The disposition of the Company’s 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.

	•		The disposition of TexSan in which the Company sold the majority of the hospital’s assets to Methodist Healthcare System of San Antonio for $76.25 million, plus an adjustment for retained working capital. The transaction was completed effective December 31, 2010.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

~~Long-Lived Assets~~Basis of Presentation— 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 the Company’s strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. Due to a decline in operating performance at certain hospitals during 2009, the Company performed impairment tests as of September 30, 2009. The results of those tests indicated that no impairment existed as of that date. The Company will continue to monitor operating performance to determine if additional impairment tests are necessary in future periods. If impairment is determined to be present in such periods, the resulting impairment charges could be material to the Company’s consolidated financial statements.

The Company’s unaudited interim consolidated financial statements as of December 31, ~~2009~~2010 and for the three months ended December 31, ~~2009~~2010 and ~~2008~~2009 have been prepared in accordance with accounting principles generally accepted in the United States of America hereafter, (“generally accepted accounting principles”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to fairly state the results of operations and financial position for the periods presented. All intercompany transactions and balances have been eliminated.

Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009.~~2010. During the three months ended December 31, ~~2009,~~2010, the Company has not made any material changes in the selection or application of its critical accounting policies that were set forth in its Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009.~~

~~The Company has evaluated subsequent events through February 9, 2010, the date these consolidated financial statements were issued, as filed in Form 10-Q with the SEC.~~2010.

2. Recent Accounting Pronouncements

The following is a summary of new accounting pronouncements that have been adopted or that may apply to the Company.

Recently Adopted Accounting ~~Pronouncements:~~Pronouncements

In December 2007, the FASB issued a new accounting standard that addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities to be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard also will require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. The Company adopted this new standard onOn October 1, 2009 and we expect this statement will have an impact on our consolidated financial statements for acquisitions consummated after October 1, 2009, but the nature and magnitude of the specific effects will depend upon the terms and size of the acquisitions consummated.

In December 2007, the FASB issued a new accounting standard that establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This new accounting standard also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The Company adopted this new standard on October 1, 2009. Upon adoption, noncontrolling interest was reclassified to a separate component of total equity within our consolidated balance sheets. See Note 1~~Business and Basis of Presentationabove for a more detailed discussion regarding the adoption of this new standard.~~

In April 2008, the FASB issued a new accounting standard which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. The new accounting standard applies to intangible assets that are acquired individually or with a group of other assets and intangible assets acquired in both business combinations and asset acquisitions. The Company adopted this new standard on October 1, 2009 with no impact to its consolidated financial statements.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

~~Effective the first quarter of fiscal 2009~~2010, the Company adopted a new accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. In February 2008, the FASB delayed the effective date of this new standard for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company elected to defer implementation of this standard until October 1, 2009 as it relates to the Company’s non-financial assets and non-financial liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Company adopted this standard on October 1, 2009 with no impact to its consolidated financial statements.

~~Recent Accounting Pronouncements:~~

~~In June 2009, the FASB issued~~ a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments ~~will~~ significantly affect the overall consolidation analysis. The provisions of this ~~new~~ accounting standard revise the definition and consideration of VIEs, primary beneficiary, and triggering events in which a company must re-evaluate its conclusions as to the consolidation of an entity. ~~This new accounting~~The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In August 2010, the FASB issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective as of the beginning of the first fiscal year beginning after ~~November~~December 15, ~~2009,~~2010, fiscal ~~2011~~2012 for the Company. The Company is evaluating the potential impacts the adoption of this ~~new standard~~ASU will have on ~~its~~our consolidated financial statements.

In August 2010, the FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which requires a company in the healthcare industry to use its direct and indirect costs of providing charity care as the measurement basis for charity care disclosures. This ASU also requires additional disclosures of the method used to identify such costs. The guidance provided in this ASU is effective for fiscal years beginning after December 15, 2010, fiscal 2012 for the Company. The adoption of this ASU is not expected to have any impact on our consolidated financial position or results of operations.

3. ~~Divestitures~~Discontinued Operations

~~During September 2009~~As required under accounting principles generally accepted in the ~~MedCath Partners Division of~~United States (“GAAP”), the ~~Company sold the assets of Sun City Cardiac Center Associates (“Sun City”). The~~ Company has classified the results of operations of ~~Sun City~~the following entities within ~~(loss)~~ income from discontinued operations, net of taxes and the assets and liabilities of these entities have been classified within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets.

During November 2010, the Company entered into an agreement to sell substantially all of the assets of TexSan for $76.25 million, plus an adjustment for retained working capital. The transaction closed on December 31, 2010 with the Company retaining all accounts receivable and the hospital’s remaining liabilities. In addition, the Company acquired the partnership’s minority investors’ ownership in accordance with the terms of a call option agreement. See Note 7 for further discussion. The gain from this sale of $34.3 million has been included in income (loss) from discontinued operations for the three months ended December 31, ~~2009 and 2008.~~2010.

During ~~December 2008~~September 2010, the ~~MedCath Partners Division~~Company entered into an agreement to sell its subsidiary that provided consulting and management services tailored primarily to cardiologists and cardiovascular surgeons. Such subsidiary’s operations had historically been included in the Corporate and other division. Such subsidiary was sold in October 2010 for an immaterial loss.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

During August 2010, the Company entered into a definitive agreement to sell certain of the hospital assets and liabilities, plus certain net working capital of AzHH for $32.0 million and the assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the limited liability company which owned AzHH retaining all accounts receivable and the hospital’s remaining liabilities. As part of its assessment of long-lived assets in June 2010, the Company ~~sold~~recognized an impairment charge of $5.2 million based on its ~~entire interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) for $6.9 million, which resulted in~~potential sales value of AzHH. Accordingly, the Company recognized a nominal gain ~~of $4.0 million, net of taxes. The Company has classified~~on the ~~results of operations of Cape Cod within (loss) income from discontinued operations, net of taxes~~sale for the three months ended December 31, ~~2009 and 2008.~~2010.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of HHA for $83.8 million plus retention of working capital to St. David’s Healthcare Partnership, L.P, which resulted in a gain of $35.7 million. The transaction closed on November 1, 2010.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”). to Good Samaritan Hospital pursuant to a definitive agreement. As of December 31, 2010 and September 30, 2010, the Company had reserved $10.0 million and $9.8 million, respectively, for Medicare outlier payments received by DHH during the year ended September 30, 2004, which are included in current liabilities of discontinued operations in the consolidated balance sheets.

The Company has ~~classified~~entered into transition services agreements with the ~~results~~buyers of ~~operations related to~~certain of its sold assets that extend into fiscal 2011. As a result, the ~~remaining assets and liabilities associated~~Company entered into a Managed Services Agreement with ~~DHH within (loss) income from discontinued operations, net~~McKesson Technologies, Inc. (“McKesson”) whereby McKesson would employ the majority of ~~taxes for~~ the ~~three months ended December 31, 2009 and 2008.~~

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~Company’s information technology employees effective November 1, 2010.

The results of operations and the assets and liabilities of discontinued operations included in the consolidated statements of operations and consolidated balance sheets are as follows:

Three Months Ended December 31,
2009 2008

Net revenue $ (44 ) $ 4,725
Gain from sale of Cape Cod — 6,640
(Loss) income before income taxes (379 ) 7,641
Income tax (benefit) expense (91 ) 2,720

Net (loss) income (288 ) 4,921
Less: Net loss (income) attributable to noncontrolling interest 143 (760 )

Net (loss) income attributable to MedCath Corporation $ (145 ) $ 4,161

December 31, September 30,
2009 2009

Cash and cash equivalents $ 11,819 $ 29,687
Accounts receivable, net 65 324
Other current assets 58 —

Current assets of discontinued operations $ 11,942 $ 30,011

Accounts payable $ 9,762 $ 9,898
Accrued liabilities 145 267

Current liabilities of discontinued operations $ 9,907 $ 10,165

4. Accounts Receivable

Accounts receivable, net, consists of the following:

December 31, September 30,
2009 2009
Receivables, principally from patients and third-party payors $ 153,167 $ 150,476
Receivables, principally from billings to hospitals for various cardiovascular procedures 1,744 1,494
Amounts due under management contracts 225 228
Other 7,189 6,094

162,325 158,292
Less allowance for doubtful accounts (89,729 ) (87,882 )

Accounts receivable, net $ 72,596 $ 70,410


	Three Months Ended December 31,
	2010			2009

Net revenue	$	22,004		$	59,386
Gain (loss) from dispositions, net		69,903			—
Loss on early termination of debt		(11,130	)		—
Income (loss) before income taxes		57,762			(1,423	)
Income tax (benefit) expense		18,634			(293	)

Net income (loss)		39,128			(1,130	)
Less: Net (income) loss attributable to noncontrolling interest		(9,251	)		376

Net income (loss) attributable to MedCath Corporation	$	29,877		$	(754	)


	December 31,		September 30,
	2010		2010

Cash and cash equivalents	$	45,427	$	13,889
Accounts receivable, net		11,478		23,597
Other current assets		440		10,434

Current assets of discontinued operations	$	57,345	$	47,920


Property and equipment, net	$	—	$	115,670
Other assets		1,232		3,620

Long-term assets of discontinued operations	$	1,232	$	119,290


Accounts payable	$	14,003	$	25,379
Accrued liabilities and current portion of obligations under capital leases		3,011		9,665

Current liabilities of discontinued operations	$	17,014	$	35,044


Long-term debt and obligations under capital leases	$	—	$	35,302
Other long-term obligations		—		666

Long-term liabilities of discontinued operations	$	—	$	35,968

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

Included in the Company’s discontinued liabilities as of September 30, 2010 is a Real Estate Investment Trust Loan (the “REIT Loan”) aggregating $34.6 million. Borrowings under this REIT Loan were collateralized by a pledge of the Company’s interest in the related hospital’s property, equipment and certain other assets. The REIT Loan required monthly, interest-only payments for ten years, at which time the loan was due in full, maturing January 2016. The interest rate on this loan was 8 1/2%. Upon the disposition of the Company’s interest in the related hospital, the REIT Loan was repaid in full in November 2010 and the Company incurred an $11.1 million prepayment penalty, which is included in income (loss) from discontinued operations.

Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. Because 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.

4. Accounts Receivable

Accounts receivable, net, consists of the following:


	December 31,			September 30,
	2010			2010
Receivables, principally from patients and third-party payors	$	106,804		$	103,314
Receivables, principally from billings to hospitals for various cardiovascular procedures		1,428			1,027
Other		2,975			2,555

		111,207			106,896
Less allowance for doubtful accounts		(66,412	)		(63,085	)

Accounts receivable, net	$	44,795		$	43,811

5. Investments in Affiliates

The Company’s determination of the appropriate consolidation method to follow with respect to investments in affiliates is based on the amount of control the Company has and the ownership level in the underlying entity. Investments in entities that the Company does not control, but over whose operations the Company has the ability to exercise significant influence (including investments where the Company has a less than 20% ownership) are accounted for under the equity method. The Company additionally considers if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At December 31, 2010, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. At December 31, 2010, the Company owns a noncontrolling interest in Harlingen Medical Center and certain diagnostic ventures and partnerships, for which the Company neither has substantive control over the ventures nor is the primary beneficiary. These investments are included in Other Assets on the consolidated balance sheets.

On October 1, 2010, the Company sold its interest in Avera Heart Hospital of South Dakota for $25.1 million to Avera McKennan whereby Avera McKennan purchased a MedCath subsidiary which was the indirect owner of a one-third ownership interest and which held management rights in Avera Heart Hospital of South Dakota. Prior to its disposition, the Company had accounted for its investment in Avera Heart Hospital of South Dakota using the equity method of accounting. The Company recognized a gain on the disposition of $15.4 million. The Company’s investment in Avera Heart Hospital of South Dakota reflected its proportionate share of an interest rate swap that the hospital had entered into. The cumulative unrealized loss of $0.5 million (net of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with the sale of the Company’s ownership interest.

On November 1, 2010, the Company sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million. The Company recognized a write down of its investment in the fourth quarter of fiscal 2010 to record the Company’s investment in such business at its net realizable value expected from the sale proceeds. Prior to its disposition, the Company had accounted for its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity method of accounting.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands, except percentages and per share data)

The Company is required to make mandatory prepayments of principal in specified amounts upon the occurrence of certain events identified in the Amended Credit Facility and is permitted to make voluntary prepayments of principal under the Amended Credit Facility. The Term Loan is subject to amortization of principal in quarterly installments, ~~commencing on~~which began March 31, 2010. The maturity date of both the Term Loan and the Revolver is November 10, 2011.

On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit Facility (the “First Amendment”). The ~~entire $75.0~~Company entered into the First Amendment to provide additional financial and liquidity flexibility in connection with its previously announced effort to explore strategic alternatives. The First Amendment contains modifications of certain financial covenants and other requirements of the Amended Credit Facility; including, but not limited to: modifications to certain definitions contained in the Amended Credit Facility, including the definitions of certain financial terms to permit additional add backs (such as an add back for charges and professional expenses incurred in connection with asset dispositions), subject to maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics derived in accordance with such definitions, for certain financial covenant calculations; increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset dispositions covenant to permit additional asset dispositions subject to no events of default and require that any net cash proceeds from an asset disposition or series of dispositions in excess of $50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the ~~Credit Facility at December 31, 2009 relates to the Term Loan. The maximum availability under the~~ Revolver ~~is $85.0 million which is reduced by outstanding~~or cash collateralize letters of credit ~~totaling $2.4 million at December 31, 2009.~~

~~During December 2008~~to the ~~Company redeemed its~~extent outstanding ~~9 7/8% senior notes (the “Senior Notes”) issued~~and permanently reduce the Revolver by ~~MedCath Holdings Corp., a wholly owned subsidiary~~50% of the ~~Company, for $111.2 million,~~net cash proceeds, which ~~included~~could shorten the ~~payment~~term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver will also reduce the revolving credit commitment by a ~~repurchase premium of $5.0 million and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand.~~corresponding amount.

In addition to the aforementioned repurchase premium, the Company incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statements of operations as loss on early extinguishment of debt forquarterly installment, during the three months ended December 31, ~~2008.~~2010, the Company paid $4.8 million using net cash proceeds from asset dispositions. The Revolver including letters of credit will not be permitted to remain outstanding after the full repayment of the Term Loan. The First Amendment also provides for a reduction in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. As noted under the terms of the First Amendment, the Revolver was further reduced to $54.4 million at December 31, 2010 for mandatory repayment of principal using net cash proceeds from asset dispositions. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at September 30, 2010 or December 31, 2010, and will be retested at the fiscal quarter ending March 31, 2011 and subsequent fiscal quarters.

As further noted in Note 14, the Company made an additional $20.6 million repayment of outstanding principal in January 2011.

Debt Covenants—AtAs of December 31, ~~2009~~2010 and September 30, ~~2009,~~2010, the Company was in violation of financial covenants under equipment loans at its consolidated subsidiary TexSAn Heart Hospital. Accordingly, the total outstanding balance for these loans of $5.3 million and $6.1 million, respectively, has been included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance sheets. The covenant violations did not result in any other non-compliance related to the remaining covenants governing the Company’s outstanding debt; thereby the Company remained in compliance with all ~~other covenants.~~covenants governing its outstanding debt.

~~Fair Value~~Interest Rate Swap— During the year ended September 30, 2006 one of ~~Financial Instruments~~—the hospitals in which the Company had a noncontrolling interest and accounted for under the equity method, entered into an interest rate swap for purposes of hedging variable interest payments on long term debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive income of the hospital. The Company ~~considers the carrying amounts~~recorded its proportionate share of ~~significant classes of financial instruments on~~comprehensive income within stockholders’ equity in 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, 2009 and September 30, 2009. The estimated fair value of long-term debt, including the current portion, at December 31, 2009 was approximately $120.8 million as compared to a carrying value of $115.6 million. At September 30, 2009, the estimated fair value of long-term debt, including the current portion, was approximately $127.6 million as compared to a carrying value of $121.4 million. Fair value of the Company’s fixed rate debt was estimated using discontinued cash flow analyses, based on the Company’s ~~current incremental borrowing rates for similar types~~ownership interest in that hospital. However, as noted in Note 5, the cumulative unrealized loss of ~~arrangements and market information. The fair value~~$0.5 million (net of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with the sale of the Company’s ~~variable rate debt was determined to approximate its carrying value, due to the underlying variable~~ownership interest ~~rates.~~on October 1, 2010.

7. Contingencies and Commitments

Put and Call Options— During August 2010, the Company entered into a put/call agreement with the minority shareholders one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put allowed the Company’s noncontrolling shareholders in the hospital to put their shares to the Company for the net amount of the physician investors’ unreturned capital contributions. The noncontrolling shareholders’ recorded basis in their partnership interest was zero prior to the amendment of this agreement. Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9 million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its call right and recognized additional redeemable noncontrolling interest of $2.2 million. Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling interest in this partnership together with amounts due from the noncontrolling shareholders into a net obligation of $5.7 million, which is included in other accrued liabilities as of December 31, 2010.

During September 2010, the Company entered into a call agreement with the minority shareholders of one of its hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest owned by physician investors for an amount equal to the net amount of the physician investors unreturned capital contributions ($2.7 million at December 31, 2010 and September 30, 2010).

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

In 2005, CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in 2005 in three states (New York, California and Florida) which was expanded into the three additional states of Arizona, Massachusetts and South Carolina in July 2007. No RAC audits, however, were initiated at the Company’s Arizona or California hospitals during the demonstration project. The program was made permanent by the Tax Relief and Health Care Act of 2006 enacted in December 2006. CMS announced in March 2008 the end of the demonstration project and the commencement of the permanent program by the expansion of the RAC program to additional states beginning in the summer and fall 2008 and its plans to have RACs in place in all 50 states by 2010.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

The Health Care Reform Laws expanded the RAC program’s scope to include Medicaid claims by requiring all states to enter into contracts with RACs by December 31, 2010. The Company believes the claims for reimbursement submitted to the Medicare ~~program~~and Medicaid programs by the Company’s facilities have been accurate, however the Company is unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through December 31, ~~2009.~~2010. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

During ~~the prior~~ fiscal ~~year,~~years 2008 and 2007, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s consolidated subsidiary hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company began negotiating a settlement ~~agreement~~agreements during the ~~third~~second quarter of fiscal 2009 with the DOJ whereby the Company iswas expected to pay ~~approximately~~ $0.8 million to settle and obtain ~~a release~~releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations dodid not involve patient care, and ~~relate~~related solely to whether the procedures were properly reimbursable by Medicare. The settlement ~~would~~did not include any finding of wrong-doing or any admission of liability. As part of the settlement, the Company is also negotiating with the Department of Health and Human Services, Office of Inspector General (“OIG”), to obtain a release from any federal health care program permissive exclusion actions to be instituted by the OIG. During the quarter ended December 31, 2009, the Company paid $0.6 million and the remaining $0.2 million was paid prior to September 30, 2010. Both settlement agreements were executed during fiscal 2010.

In March 2010, the DOJ issued a civil investigative demand (“CID”) pursuant to the federal False Claims Act to one of our hospitals. The CID requested information regarding Medicare claims submitted by our hospital in connection with the implantation of implantable cardioverter defibrillators (“ICDs”) during the period 2002 to the present. The Company has complied with all information requested by the DOJ for this hospital. The Company is unable to evaluate the outcome of this investigation at this time; however ICD revenue is a material component of total net revenue for this hospital and this investigation could have a material adverse effect on the Company’s financial condition and results of operations.

In September 2010, the Company received a letter from the DOJ advising it that an investigation is being conducted to determine whether certain of the ~~$0.8 million initially accrued within~~Company’s other ~~accrued liabilities~~hospitals have submitted claims excluded from coverage. The period of time covered by the investigation is 2003 to the present. The letter states that the DOJ’s data indicates that many of the Company’s hospitals have claims for the implantation of ICD’s which were not medically indicated and/or otherwise violated Medicare payment policy. Management understands that the DOJ has submitted similar requests to many other hospitals and hospital systems across the country as well as to the ICD manufacturers themselves. The Company is fully cooperating and has entered into a tolling agreement with the government in this investigation. To date, the DOJ has not asserted any claim against the Company’s other hospitals. Because the Company is in the early stages of this investigation, the Company is unable to estimate the outcome of this investigation. The Company’s total ICD net revenue is a material component of total net patient revenue and this investigation could have a material adverse effect on the ~~consolidated balance sheet as~~Company’s financial condition and results of ~~September 30, 2009. As~~operations.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

On January 8, 2009, the California Supreme Court ruled inProspect Medical Group, Inc., et al. v. Northridge Emergency Medical Group, et al.(2009) 45 Cal. 4^th 497, that under California’s Knox-Keene statute healthcare providers may not bill patients for covered emergency out-patient services for which health plans or capitated payors are invoiced by the provider but fail to pay the provider. The California Supreme Court held that the only recourse for healthcare providers is to pursue the payors directly. TheProspectdecision does not apply to amounts that the health plan or capitated payor is not obligated to pay under the terms of ~~December 31, 2009 $0.2 million remained accrued within~~the insured’s policy or plan. Although the decision only considered emergency providers and referred to HMOs and capitated payors, future court decisions on how the so-called “balance billing” statute is interpreted does pose a risk to healthcare providers that perform emergency or other ~~accrued liabilities on~~out-patient services in the ~~consolidated balance sheet.~~state of California.

During October, 2009, a purported class action law suit was filed by an individual against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits the practice of “balance billing” for patients who are provided emergency services. ~~A class has not been certified by~~On November 24, 2010, the court ~~in this case. Currently~~granted the Bakersfield Heart Hospital’s motion to strike plaintiff’s class allegations.

During June 2010 and 2009, the Company ~~is unable to predict with certainty the outcome of this case or, if the plaintiff prevails whether the amount due to the plaintiff could be material.~~

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~

~~The Company has~~entered into a one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company ~~additionally has~~also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners ~~Division.~~Division, for each respective fiscal year. Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of December 31, ~~2009~~2010 and September 30, ~~2009,~~2010, the total estimated liability for the Company’s self-insured retention on medical malpractice claims, including an estimated amount for incurred but not reported claims, was ~~approximately $4.3~~$2.7 million ~~and $4.9 million, respectively,~~ which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$4.2~~$3.0 million and ~~$3.5~~$3.3 million as of December 31, ~~2009~~2010 and September 30, ~~2009,~~2010, respectively, which is included in other accrued liabilities in the consolidated balance sheets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of $175,000 per plan participant.

Commitments—The Company’s consolidated subsidiary hospitals provide guarantees to certain physician groups for funds required to operate and maintain services for the benefit of the hospital’s patients including emergency care ~~services~~ and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of December 31, ~~2009,~~2010, the maximum potential future payments that the Company could be required to make under these guarantees was ~~approximately $31.5~~$25.9 million through ~~October 2012.~~June 2013. At December 31, ~~2009~~2010 the Company had total liabilities of ~~$13.4~~$9.8 million for the fair value of these guarantees, of which ~~$7.0~~$6.6 million is in other accrued liabilities and ~~$6.4~~$3.2 million is in other long term obligations. Additionally, the Company had assets of ~~$13.6~~$10.2 million representing the future services to be provided by the physicians, of which ~~$7.5~~$6.5 million is in prepaid expenses and other current assets and ~~$6.1~~$3.7 million is in other assets.

8. Per Share Data

Basic— The calculation of basic earnings per share includes 150,900 and 101,500 of restricted stock units that have vested but as of December 31, 2010 and 2009, respectively, have not been converted into common stock.

Diluted— The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 913,812, and 986,637 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at December 31, 2010 and 2009, respectively, as well as 309,405 and 782,707 shares of restricted stock which were outstanding at December 31, 2010 and 2009, respectively. Dilutive options of 3,941 have been included in the calculation of diluted earnings (loss) per share at December 31, 2010. Of the outstanding stock options, 897,500 options have not been included in the calculation of diluted earnings per share at December 31, 2010 because these options were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share ~~for the three months ended~~at December 31, 2009, ~~and 2008~~ as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~


	For the Three Months Ended
	December 31, 2010					December 31, 2009
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		932,137		$	21.89		1,027,387		$	22.25

Granted		—			—		—			—
Cancelled		(18,325	)		21.81		(40,750	)		22.94


Outstanding stock options, end of period		913,812		$	21.89		986,637		$	22.23

Restricted Stock Awards

There were no grants of restricted stock during the three months ended December 31, 2010. During the three months ended December 31, 2009, the Company granted to employees 369,164 shares of restricted stock. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company defined by the Company as vice president or higher, received two equal grants of restricted stock. The first grant vests annually onin December 31of each year over a three year period. The second grant vests annually onin December ~~31,~~of each year, over a three year period if certain performance conditions are met. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. At December 31, ~~2009~~2010 the Company had ~~$4.0~~$1.8 million of unrecognized compensation expense associated with restricted stock awards.

The following table summarizes the Company’s restricted stock award activity:


	For the Three Months Ended										For the Three Months Ended
	December 31, 2009					December 31, 2008					December 31, 2010					December 31, 2009
	Number of					Number of					Number of					Number of
	Restricted			Weighted-		Restricted			Weighted-		Restricted			Weighted-		Restricted			Weighted-
	Stock Awards			Average		Stock Awards			Average		Stock Awards			Average		Stock Awards			Average
	and Units			Grant Price		and Units			Grant Price		and Units			Grant Price		and Units			Grant Price
Outstanding restricted stock awards and units, beginning of period		654,327		$	9.64		123,982		$	19.28		884,285		$	8.67		654,327		$	9.64

Granted		369,164			6.99		—			—		—			—		369,164			6.99
Vested		(90,195	)		9.30		(52,106	)		20.50		(423,980	)		9.42		(90,195	)		9.30
Cancelled		(10,026	)		9.03		(32,813	)		15.88		—			—		(10,026	)		9.03


Outstanding restricted stock awards and units, end of period		923,270		$	8.54		39,063		$	20.50		460,305		$	7.99		923,270		$	8.54

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)

~~11. Intangible Assets~~13. Fair Value Measurements

AsThe Company’s non-financial assets and liabilities not permitted or required to be measured at fair value on a recurring basis typically relate to long-lived assets held and used and long-lived assets held for sale (including investments in affiliates). Fair values are determined as follows:

	•		Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities, which generally are not applicable to non-financial assets and liabilities.

	•		Level 2 inputs utilize data points that are observable, such as independent third party market offers.

	•		Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of discounted cash flows or third party appraisals.

The Company considers the carrying amounts of ~~December 31, 2009 and September 30, 2009, the Company’s intangible assets, which are included in other assets~~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 ~~detailed~~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 ~~following table:~~

December 31, 2009 September 30, 2009
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization

Intangible Assets 555 (228 ) 730 (352 )

hospital. The ~~estimated aggregate amortization expense for each~~approval, consent and proxy allows the Company to sell all or substantially all of the ~~next five year periods ending~~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, ~~are $57~~2010) adjusted upward for ~~fiscal 2010 and 2011, and $32 for fiscal 2012, 2013, and 2014.~~

~~12. Comprehensive Income~~

Three Months Ended December 31,
2009 2008
Net (loss) income $ (1,815 ) $ 5,369
Changes in fair value of interest rate swap, net of tax benefit 56 (448 )

Comprehensive (loss) income (1,759 ) 4,921
Less: Net income attributable to noncontrolling interests (841 ) (3,123 )

Comprehensive (loss) income attributable to
MedCath Corporation common stockholders $ (2,600 ) $ 1,798

any proportionate share of additional proceeds upon a disposition transaction.

1417

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, ~~predominantly~~including 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 ownership~~As 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 ten~~six hospitals, with a total of ~~825~~533 licensed beds, of which ~~735~~489 are staffed and available, and that are located ~~predominately~~ in ~~high growth markets in seven~~five states: ~~Arizona,~~ Arkansas, California, Louisiana, New Mexico ~~South Dakota,~~ and ~~Texas~~. ~~During May 2009, we completed~~Texas. 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 new~~general acute care hospital ~~Hualapai Mountain Medical Center (“HMMC”), in Kingman, Arizona. This hospital is designed to accommodate~~that provides a ~~total~~wide range of ~~106 licensed beds,~~health services with ~~an initial opening~~a 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 16seven cardiac diagnostic and therapeutic facilities. ~~Ten~~Six of these facilities are located at hospitals operated by other parties. These facilities offer invasive diagnostic and, in some cases, therapeutic procedures. The remaining ~~six facilities are~~facility is not located at ~~hospitals~~a 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.”

~~Same Facility Hospitals.~~~~Our policy~~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 ~~include,~~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, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company or the sale of our 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.

	•		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 ~~same facility basis, only~~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 strategic options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios 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 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.

Many unknown variables, including those ~~facilities~~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 determine the approach that ~~were open~~best meets the interests of our stockholders. Final amounts available to stockholders will be diminished by asset and ~~operational during the full current~~corporate wind-down related operating and prior fiscal year comparable periods. For example, on a same facility basis for our consolidated hospital division for the three months ended December 31, 2009, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.other expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed and 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. 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 December 31,						Three Months Ended December 31,
Division	2009			2008			2010			2009
Hospital		97.3	%		96.7	%		97.4	%		96.1	%
MedCath Partners		2.6	%		3.2	%		2.5	%		3.8	%
Corporate and other		0.1	%		0.1	%		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%

The Medicare and Medicaid programs are subject to statutory and regulatory changes, 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 intermediaries~~contractors 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.

Results of Operations

Three Months Ended December 31, ~~2009~~2010 Compared to Three Months Ended December 31, ~~2008~~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 December 31,
	Three Months Ended December 31,																		(in thousands except percentages)
	(in thousands except percentages)																								Increase/
							Increase/(Decrease)						% of Net Revenue												(Decrease)			% of Net Revenue
	2009			2008			$			%			2009			2008			2010			2009			%			2010			2009
Net revenue	$	147,260		$	150,245		$	(2,985	)		(2.0	)%		100.0	%		100.0	%	$	88,900		$	87,830			1.2	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		51,821			50,169			1,652			3.3	%		35.2	%		33.4	%		32,454			31,636			2.6	%		36.5	%		36.0	%
Medical supplies expense		41,859			41,642			217			0.5	%		28.4	%		27.7	%		19,222			22,107			(13.1	)%		21.6	%		25.2	%
Bad debt expense		11,925			11,429			496			4.3	%		8.1	%		7.6	%		9,709			7,506			29.3	%		10.9	%		8.5	%
Other operating expenses		34,452			31,902			2,550			8.0	%		23.4	%		21.2	%		24,116			22,344			7.9	%		27.1	%		25.4	%
Pre-opening expenses		866			207			659			318.4	%		0.6	%		0.1	%		—			866			(100.0	)%		—			1.0	%
Depreciation		9,035			7,801			1,234			15.8	%		6.1	%		5.2	%		4,887			5,938			(17.7	)%		5.5	%		6.8	%
Amortization		8			30			(22	)		(73.3	)%		0.0	%		0.0	%
Loss on disposal of property, equipment and other assets		137			73			64			87.7	%		0.1	%		0.1	%		93			96			(3.1	)%		0.1	%		0.2	%

(Loss) income from operations		(2,843	)		6,992			(9,835	)		(140.7	)%		(1.9	)%		4.7	%
Loss from operations																				(1,581	)		(2,663	)		(40.6	)%		(1.8	)%		(3.0	)%
Other income (expenses):
Interest expense		(1,813	)		(2,857	)		1,044			36.5	%		(1.2	)%		(1.9	)%		(1,082	)		(945	)		(14.5	)%		(1.2	)%		(1.1	)%
Loss on early extinguishment of debt		—			(6,961	)		6,961			100.0	%		—			(4.6	)%
Interest and other income, net		74			101			(27	)		(26.7	)%		0.1	%		0.1	%		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		1,516			2,065			(549	)		(26.6	)%		1.0	%		1.3	%		602			1,516			(60.3	)%		0.7	%		1.6	%

Loss from continuing operations before
income taxes		(3,066	)		(660	)		(2,406	)		364.5	%		(2.0	)%		(0.4	)%
Income tax benefit		(1,539	)		(1,108	)		(431	)		38.9	%		(1.0	)%		(0.7	)%
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	)%

(Loss) income from continuing operations		(1,527	)		448			(1,975	)		(440.8	)%		(1.0	)%		0.3	%
(Loss) income from discontinued operations, net of taxes		(288	)		4,921			(5,209	)		(105.9	)%		(0.2	)%		3.3	%
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 (loss) income		(1,815	)		5,369			(7,184	)		(133.8	)%		(1.2	)%		3.6	%
Net income (loss)																				48,465			(1,815	)		(2770.2	)%		54.5	%		(2.1	)%
Less: Net income attributable to noncontrolling interest		(841	)		(3,123	)		2,282			(73.1	)%		(0.6	)%		(2.1	)%		(11,426	)		(841	)		1258.6	%		(12.9	)%		(1.0	)%

Net (loss) income attributable to MedCath Corporation	$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%
Net income (loss) attributable to MedCath Corporation																			$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(2,511	)	$	(1,915	)	$	(596	)		31.1	%		(1.7	)%		(1.3	)%
(Loss) income from discontinued operations, net of taxes		(145	)		4,161			(4,306	)		(103.5	)%		(0.1	)%		2.8	%
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 (loss) income	$	(2,656	)	$	2,246		$	(4,902	)		(218.3	)%		(1.8	)%		1.5	%
Net income (loss)																			$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%

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 ~~cases increased by 2%, total~~net revenue decrease is due to the mix of 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 ~~hospital net patient~~outpatient revenue ~~was down 4.7%, or $6.7 million, from $142.7 to $136.0. This decline~~increase is due ~~primarily~~ to ~~an 8.3% reduction~~a 7.1% increase in ~~inpatient open heart cases resulting in a $6.9 million reduction in total~~ same facility net patient revenue offset by an increase in drug-eluting stents and other catheter procedures. We believe this decline is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been successful for our patients at our hospitals. This decline was offset by a 35%, or $6.1 million, increase in our inpatient non-cardiovascular cases. This increase is directly attributableoutpatient cases, particularly emergency department cases, due to the expansion at several of our ~~hospitals as well as seasonal illnesses.~~facilities and more procedures being performed in an outpatient setting.

Net revenue for the first quarter of fiscal ~~2010~~2011 included charity care deductions of ~~$2.6~~$2.1 million compared to charity care deductions of ~~$0.8~~$1.9 million for the first quarter of fiscal ~~2009.~~2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.Personnel expense increased ~~3.3%~~2.6%, or $0.9 million, to ~~$51.8~~$32.5 million for the first quarter of fiscal ~~2010~~2011 from ~~$50.2~~$31.6 million for the first quarter of fiscal ~~2009. Personnel expense on a same facility basis was as follows:~~

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Personnel expense $ 48,360 $ 50,169 $ (1,809 ) (3.6 )% 33.9 % 33.4 %
2010.

The ~~$1.8 million reduction~~increase in ~~same facility~~ personnel expense was primarily due to a ~~$1.5~~$1.3 million ~~reduction in temporary contract labor, a $0.6 million reduction in bonus expense, a $0.4 million reduction in salaries and wages and a $0.4 million reduction~~increase in stock based compensation ~~expense offset by increases in accrued paid time off expense and workers~~expense. As part of the strategic options process, the compensation ~~expense. Temporary contract labor and salaries and wage expense were reduced by~~committee of our ~~efforts to better align our expenses with our revenue as well as several positions being vacant~~Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the first quarter of fiscal 2011 to ensure 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 first quarter of fiscal 2011. The shares subject to the waiver of vesting criteria contain transfer restrictions that will remain in place 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 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.

Medical supplies expense.Medical supplies expense decreased 13.1%, or $2.9 million, to $19.2 million for the first quarter of fiscal 2011 from $22.1 million for the first quarter of fiscal 2010. This decline is due to $2.9 million in sales tax refunds at two of our hospitals. Absent the refunds, medical supplies expense was flat year over year. Medical supplies expense increased $0.7 million at HMMC which began operations in the second month of the first quarter of fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was offset by a decline in ICD expense as the result of a 7.6% decline in ICD procedures for the first quarter of fiscal 2011 compared to the same period of the prior year. Bonus expense is incurred as bonuses are accrued. Some of our facilities accrued less bonus expense during the first quarter of fiscal 2010 compared to the same period of the prior year due to the number of employees that qualified for bonuses. Stock based compensation is recognized based on the number of equity awards granted. There was a grant of restricted stock to employees during the first quarter of fiscal 2010 as well as the acceleration of expense upon the acceleration of vesting for grants issued during fiscal 2009. Paid time off expense is directly related to the hours earned and not taken by our employees. This expense will increase during any fiscal quarter in which wage increases were given to employees, which only applied to a few of our facilities. Workers compensation expense increased at one of our facilities due to a new claim incurred during the first quarter of fiscal 2010.

~~Medical supplies expense.~~Medical supplies expense increased 0.5% to $41.9 million for the first quarter of fiscal 2010 from $41.6 million for the first quarter of fiscal 2009. Medical supplies expense on a same facility basis was as follows:

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Medical supplies expense $ 41,063 $ 41,642 $ (579 ) (1.4 )% 28.8 % 27.7 %

The $0.6 million decrease in medical supplies expense is a result of a 5.0% decrease in net revenue on a same facility basis. Medical supplies expense as a percentage of net revenue increased 1.1% in the first fiscal quarter of fiscal 2010 compared to the same period in the prior year. The increase in medical supplies expense as a percentage of net revenue is due to the mix of procedures performed during the first quarter of fiscal 2010. We had an 8.3% reduction in open heart surgeries, which have high net revenue per case. With less open heart net revenue, the percentage of medical supplies will increase as a percentage of net revenue.

Bad debt expense.Bad debt expense increased ~~4.3%~~29.3%, or $2.2 million, to ~~$11.9~~$9.7 million for the first quarter of fiscal ~~2010~~2011 from ~~$11.4~~$7.5 million for the first quarter of fiscal ~~2009.~~2010. As a percentage of net revenue, bad debt expense increased to ~~8.1%~~10.9% for the first quarter of fiscal ~~2010~~2011 as compared to ~~7.6%~~8.5% for the comparable period of fiscal ~~2009. Bad debt expense on~~2010. This increase is due to a ~~same facility basis was as follows:~~

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Bad debt expense $ 10,905 $ 11,429 $ (524 ) (4.6 )% 7.6 % 7.6 %

~~Our total same facility uncompensated care including charity care and bad debt expense was 9.6% of total same facility~~68.8%, or $3.2 million, increase in self-pay net ~~patient hospital~~ revenue for the first quarter of fiscal ~~2010~~2011 compared to ~~8.5%~~the first quarter of ~~total same facility~~fiscal 2010. We reserve for the estimated bad debt on self-pay net ~~patient~~revenue at the time of 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 ~~2009. The total number of patients which applied and qualified for charity care increased during first quarter of fiscal 2010~~2011 compared to the first quarter of fiscal 2009. We reported $1.8 million more charity deductions to net revenue during the first quarter of fiscal 2010 when compared to the first quarter of fiscal 2009. Bad debt expense alone (not including charity care) decreased $0.5 million for the first quarter of fiscal 2010 compared to the same period of the prior year. This is attributable to our improved collection experience over the past several quarters as well a reduction in self-pay net revenue for certain of our facilities during the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009.2010.

Other operating expenses.Other operating expenses increased ~~8.0%~~7.9%, or $1.8 million, to ~~$34.5~~$24.1 million for the first quarter of fiscal ~~2010~~2011 from ~~$31.9~~$22.3 million for the first quarter of fiscal ~~2009. Other~~2010. The material and notable increases (decreases) in operating ~~expense on a same facility basis was~~expenses were as ~~follows:~~reflected below (in millions):

Three Months Ended December 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2009 2008 $ % 2009 2008
Other operating expense $ 31,911 $ 31,902 $ 9 — 22.4 % 21.2 %


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	)

~~While~~Our professional fees have increased $1.2 million as the direct result of our ~~total same facility other operating expense remained flat~~strategic options process, which included the sale of several of our assets and the exploration of alternatives for the ~~first quarter~~sale of our remaining assets or our equity. We will continue to incur professional fees during fiscal ~~2010 compared~~2011 as our strategic options process continues.

Our purchased services — nonclinical expense includes $1.3 million in third party consulting fees to ~~fiscal 2009, we did experience some fluctuations in~~obtain sales tax refunds on medical supplies at certain of our ~~operating expenses that offset each other in comparison to the prior year. Our purchased service~~hospitals. As noted above under medical supplies expense, ~~for clinical and non-clinical contractors increased approximately $0.9~~we filed sales tax refund claims of $2.9 million during the first quarter of fiscal ~~2010 compared~~2011. The increase related to the same period of the prior year to accommodate the slight increase in volume at certain of our hospitals. In addition, maintenance expense for our Hospital Division increased $0.4 million for the first quarter fiscal 2010 when compared to the same period of the prior year due to the fact that our hospitals are aging and in need of higher maintenance. These increases wereconsulting fees was offset by ~~a $0.6 reduction~~declines in non-clinical services as we control costs to better align with our net revenues.

Our corporate division medical ~~malpractice~~benefits expense ~~and a $0.9 million reduction in advertising expense. Medical malpractice expense was higher~~increases as medical claims increase. The claims increase during the first quarter of fiscal ~~2009~~2011 compared to the first quarter of fiscal 2010 is the direct cause for the $0.4 million increase.

Repairs 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 on the new facility.

Temporary labor has increased at our corporate division to support our hospitals during the strategic 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 2011 compared to the first quarter of fiscal 2010, our salaries and wages 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 first quarter of fiscal 2011 increased $0.2 million as we anticipate more of our hospitals will meet the fiscal 2011 bonus targets based on the first quarter of fiscal 2011 results compared to the estimate for the first quarter of fiscal 2010. We evaluate the progress of our bonus programs on a quarterly basis and adjust quarterly as deemed necessary.

Our relocation, recruiting and travel expense declined $0.4 million during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 due to our strategic options process. We hired several key executives during the first quarter of fiscal 2010, which contributed to a ~~claim~~higher expense in the prior year compared to the first quarter of fiscal 2011. In addition, we have incurred less travel expense as assets are sold.

Our physician practice expenses have declined $0.3 million during ~~that~~the first quarter ~~which has since been paid. Advertising expense~~of fiscal 2011 compared to the first quarter of fiscal 2010 as our primary care practice at one of our hospitals has decreased ~~due~~the total number of physicians within the practice. Conversely, there was a $0.4 million decline in ~~specific marketing campaigns~~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 first quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in ~~certain~~severance expense and $0.4 million in retention bonus expense during the 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 ~~markets.~~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 ~~decreased $1.0~~increased $0.2 million ~~or 36.5%~~ to ~~$1.8~~$1.1 million for the first quarter of fiscal ~~2010~~2011 from ~~$2.8~~$0.9 million for the first quarter of fiscal ~~2009.~~2010. The ~~$1.0 million decrease~~increase in interest expense is ~~primarily~~ attributable to a slight increase in the ~~overall reduction in our~~rate charged on outstanding debt and an increase in the amount 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 2011 is related to the sale of our interest ~~rates~~in Avera Heart Hospital of South Dakota (“AHHSD”) partially offset by a nominal loss on ~~our outstanding debt.~~the sale of the Company’s interest in Southwest Arizona Heart and 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.

~~Total combined~~Equity in net earnings of unconsolidated affiliates ~~in which we have a noncontrolling interest,~~ decreased during the first quarter of fiscal ~~2010~~2011 to ~~$5.8~~$0.6 million from ~~$13.0~~$1.5 million for the same period of ~~the prior year. Approximately $6.2~~fiscal 2010. AHHSD contributed $1.0 million of ~~the reduction in total combined~~ net earnings of unconsolidated affiliates was from unconsolidated affiliates within our MedCath Partners Division, $0.6 million of the reduction in total combined net earnings of unconsolidated affiliates was from unconsolidated affiliates within our Hospital Division and the remaining $0.4 million reduction was due to a medical office venture within corporate and other. As a result of these total combined decreases from our equity investments in unconsolidated affiliates, our equity in net earnings of unconsolidated affiliates decreased $0.5 million forduring the first quarter of fiscal 2010 ~~as compared~~and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases due to the ~~comparable period~~disposition of ~~fiscal 2009.~~its interest in Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010.

Income tax ~~benefit.~~expense (benefit).Income tax expense (benefit) was an expense of $4.5 million for the first quarter of fiscal 2011 compared to a benefit ~~was $1.5~~of $(1.3) million for the first quarter of fiscal 2010, ~~compared to $1.1 million for the first quarter of fiscal 2009,~~ which represents an effective tax rate of ~~approximately 38.0%~~32.4% and ~~36.6%~~(66.1)% for the respective periods. The ~~lower income tax rate for 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 ~~2009 was~~2010 effective rate is above our federal statutory rate of 35.0% due to the ~~result~~recognition of a disproportionate share of the ~~impact~~losses at certain of ~~nondeductible permanent differences from incentive stock option grants.~~our hospitals, partially offset by the allocation of income allocable to our noncontrolling interests. The ~~expense for incentive stock options is not tax deductible.~~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.

(~~Loss)~~(Loss) income from discontinued operations, net of taxes.(Loss) income from discontinued operations, net of taxes ~~reflects the results~~increased to income of ~~Dayton Heart Hospital, Cape Cod Cardiology, and Sun City Cardiac Center Associates for the first quarter of fiscal 2010 and fiscal 2009. Discontinued operations decreased to a loss of $0.1~~$26.1 million, net of taxes for the first quarter of fiscal ~~2010~~2011 from ~~income~~a loss of ~~$4.2~~$1.1 million, net of taxes, for the comparable period of fiscal ~~2009. Losses from discontinued operations during~~2010. During the first quarter of fiscal ~~2010 related to continued activities with~~2011, the ~~divested facilities, primarily related to insurance liabilities, whereas the income from~~Company recognized pre-tax gains upon disposition of assets of discontinued operations ~~from same quarter~~ of ~~fiscal 2009 reflected the operating income from Sun City and the gain from the divestiture of Cape Cod, which was sold during the first quarter of fiscal 2009,~~$69.9 million, partially offset by ~~losses~~an $11.1 million loss on early termination of debt at ~~Dayton~~one of the facilities. The significant components of the gains recognized are a $35.7 million gain and a $34.3 million gain on the sale of the assets of HHA and TexSan Heart ~~Hospital.~~Hospital, respectively. In addition, pretax loss from operating activities of the discontinued businesses decreased $1.0 million.

Liquidity and Capital Resources

~~Working Capital and Cash Flow Activities~~. Our consolidated working capital from continuing operations was $47.8 million at December 31, 2009 and $40.4 million at September 30, 2009. Consolidated working capital from continuing operations increased $2.2 million due to the increase in patient accounts receivable and $1.7 million as a result of being in an income tax receivable position due to our net loss for the quarter versus an income tax payable position of $0.7 million as of September 30, 2009. We also received a $2.0 million distribution from one of our minority owned affiliates due to the release of restrictions on collateralized cash.

~~At December 31, 2009, we continue to carry a reserve of $9.7 million for outlier payments received in 2004, which is recorded in current liabilities of discontinued operations.~~

The cash provided by continuing operations from operating activities was ~~$3.9~~$0.5 million for the first three months of fiscal ~~2010~~2011 compared to ~~$18.9~~$2.0 million for the comparable period of fiscal 2009. The decrease in cash provided by continuing operations is primarily the result of $5.2 million increase in accounts receivable associated with the opening of HMMC, a $1.7 million increase in our income tax receivable due to our net loss for the quarter versus an income tax payable position as of September 30, 2009 with the remaining reduction due to the timing of payments for accounts payable and prepaid expenses. We also received a $2.0 million distribution from one of our minority owned affiliates due to the release of restrictions on collateralized cash during the first quarter of fiscal 2010.

Our investing activities from continuing operations ~~used~~provided net cash of ~~$9.2~~$32.1 million for the first three months of fiscal ~~2010~~2011 compared to ~~$29.9~~a use of cash of $7.5 million for the comparable period of fiscal ~~2009. The total cash used~~2010. Such increase is primarily due to the net proceeds of $31.9 million for ~~capital expenditures decreased by $21.0 million~~the disposition of the Company’s interest in Avera Heart Hospital of South Dakota and Southwest Arizona Heart and Vascular LLC during the first ~~three months~~quarter of fiscal ~~2010~~2011. 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 same period in fiscal ~~2009, as a direct result~~2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of ~~the completion of the expansion of our hospital facilities and the construction of our new acute care hospital~~Hualapai Mountain Medical Center, which opened in ~~Kingman, Arizona.~~October 2009.

Our financing activities from continuing operations used net cash of ~~$14.5~~$12.9 million for the first three months of fiscal ~~2010~~2011 compared to ~~$34.2~~$12.3 million for the comparable period of fiscal ~~2009.~~2010. Cash used ~~in financing activities decreased $19.7~~to repay long-term debt and obligations under capital leases increased $2.8 million for the first three months of fiscal ~~2010~~2011 as compared to the comparable period of fiscal ~~2009. The decrease~~2010. This increase was ~~due to the repayment of our 9 7/8% Senior Notes during December 2008~~partially offset by a ~~$5.0~~decrease of $2.4 million ~~payment on our senior secured credit facility during~~in distributions to noncontrolling shareholders. Subsequent to the end of the first quarter 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 ~~$9.3~~$0.2 million and ~~$30.1~~$7.5 million for the first three months of fiscal years ~~2010~~2011 and ~~2009,~~2010, respectively. Of the ~~$9.3~~$7.5 million of cash paid for property and equipment during the first three months of fiscal 2010, ~~$4.5~~$3.7 million related to maintenance capital expenditures. The $30.1 million cash paid for property and equipment during the first three months of fiscal 2009 primarily related to the development of HMMC and the expansion projects of 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 December 31, ~~2009,~~2010, we had ~~$122.2~~$67.4 million of outstanding long-term debt and obligations under capital leases, of which ~~$18.3~~$61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of ~~$75.0~~$58.9 million. The remaining outstanding ~~long-term debt and obligations~~obligation under capital leases of ~~$47.2~~$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 is reduced by outstanding letters of credit totaling ~~$2.4~~$1.7 million as of December 31, ~~2009.~~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. AtHowever, 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, ~~2009~~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 $5.3 million~~fiscal 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 December 31, ~~2009,~~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 ~~Faculty~~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 Facility~~asset 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.

Intercompany Financing Arrangements.We provide secured real estate, equipment and working capital financings to our majority-owned hospitals. ~~The aggregate amount of the intercompany real estate, equipment and working capital and other loans outstanding as of December 31, 2009 was $316.3 million.~~

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 27 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 ~~fixed~~ rates ranging from ~~3.50%~~4.87% to ~~8.58%~~8.43%. The weighted average interest rate for the intercompany equipment loans at December 31, ~~2009~~2010 was ~~6.41%~~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 ~~certain~~ 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, ~~2009 and September 30, 2009, we held $36.3 million and~~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 ~~respectively,~~after taking into account distributions to minority owners, the liquidation of ~~intercompany~~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 ~~other notes receivable and related accrued interest, net of advances from our hospitals.~~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 three months of fiscal ~~2010~~2011 we adopted a new accounting ~~policies~~policy as discussed in Note 2 —Recent Accounting Pronouncementsto our consolidated financial statements. The adoption of ~~these~~this new accounting ~~policies~~policy did not have a material impact on our consolidated financial statements.

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,~~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.

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 three months of ~~2010.~~2011. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009~~2010 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 ~~$75.0~~$58.9 million at December 31, ~~2009.~~2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately ~~$0.2~~$0.1 million during the three month period ended December 31, ~~2009.~~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 December 31, ~~2009,~~2010, that the Company’s disclosure controls and procedures were effective as of December 31, ~~2009~~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.

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, ~~2009~~2010 or filings subsequently made with the Securities and Exchange ~~Commission, except for the addition of the following risk factor:~~

~~Impairment of Long-Lived Assets~~

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.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 three month period ended December 31, 2009.

~~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.~~

Item 6. Exhibits


Exhibit No.		Description

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	~~10.1~~	Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLC and Heart Hospital IV, L.P. (1)


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~~Agreement dated and effective December ~~21, 2006~~30, 2010 by and between MedCath Corporation and ~~Blair W. Todt~~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

	~~31.1~~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.

2327

INDEX TO EXHIBITS


Exhibit No.		Description

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	~~10.1~~	Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., LLC 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~~Agreement dated and effective December ~~21, 2006~~30, 2010 by and between MedCath Corporation and ~~Blair W. Todt~~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

	~~31.1~~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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	Page
PART I. FINANCIAL INFORMATION		13
Item 1. Unaudited Financial Statements		13
Consolidated Balance Sheets as of December 31, ~~2009~~2010 and September 30, ~~2009~~2010		13
Consolidated Statements of Operations for the Three Months Ended December 31, ~~2009~~2010 and ~~2008~~2009		24
Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, ~~2009~~2010		35
Consolidated Statements of Cash Flows for the Three Months Ended December 31, ~~2009~~2010 and ~~2008~~2009		46
Notes to Unaudited Consolidated Financial Statements		57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1518
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2226
Item 4. Controls and Procedures		2226
PART II. OTHER INFORMATION		2226
Item 1. Legal Proceedings		2226
Item 1A. Risk Factors		22
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		2326
Item 6. Exhibits		2326
SIGNATURES		2428
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	Three Months Ended December 31,				Three Months Ended December 31,
	2009		2008		2010		2009

Net revenue	$	53,326	$	68,162	$	35,968	$	53,326
Income from operations	$	8,073	$	15,028	$	6,425	$	8,073
Net income	$	5,777	$	12,907	$	4,440	$	5,777


	December 31,		September 30,		December 31,		September 30,
	2009		2009		2010		2010

Current assets	$	50,309	$	68,675	$	33,063	$	58,690
Long-term assets	$	148,433	$	149,194	$	79,092	$	144,402
Current liabilities	$	23,866	$	25,967	$	14,325	$	23,922
Long-term liabilities	$	122,786	$	122,685	$	98,848	$	121,524


	December 31,			September 30,
	2009			2009

Credit Facility	$	75,000		$	80,000
REIT Loan		35,308			35,308
Notes payable to various lenders		5,254			6,054

		115,562			121,362
Less current portion		(16,504	)		(19,491	)

Long-term debt	$	99,058		$	101,871


	December 31,			September 30,
	2010			2010

Land	$	17,635		$	17,635
Buildings		149,901			149,897
Equipment		155,972			163,746
Construction in progress		29			25

Total, at cost		323,537			331,303
Less accumulated depreciation		(146,652	)		(149,081	)

Property and equipment, net	$	176,885		$	182,222


																										Redeemable
												Accumulated														Noncontrolling
												Other											Total			Interests
	Common Stock					Paid-in			Accumulated			Comprehensive			Treasury Stock					Noncontrolling			Equity			(Temporary
	Shares			Par Value		Capital			Deficit			Loss			Shares		Amount			Interests			(Permanent)			Equity)

Balance, September 30, 2009		22,105		$	216	$	455,259		$	(91,420	)	$	(360	)		1,954	$	(44,797	)	$	18,184		$	337,082		$	7,448
Stock awards, including cancelations and income tax benefit		359			—		154			—			—			—		—			—			154			—
Tax withholdings for vested restricted stock awards		(27	)		—		(253	)		—			—			—		—			—			(253	)		—
Distributions to noncontrolling interests		—			—		—			—			—			—		—			(11,595	)		(11,595	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interests		—			—		—			—			—			—		—			119			119			26
Sale of equity interest		—			—		113			—			—			—		—			27			140			—
Comprehensive loss:
Net loss		—			—		—			(2,656	)		—			—		—			458			(2,198	)		383
Change in fair value of interest rate swap, net of income tax benefit (*)		—			—		—			—			56			—		—			—			56			—

Total comprehensive loss																								(2,142	)		383

Balance, December 31, 2009		22,437		$	216	$	455,273		$	(94,076	)	$	(304	)		1,954	$	(44,797	)	$	7,193		$	323,505		$	4,297


~~(*)~~		~~Tax benefits were $38 for the quarter ended December 31, 2009.~~


(*)		Tax expense was $286 for the quarter ended December 31, 2010.


	Three Months Ended December 31,						Three Months Ended December 31,
Payor	2009			2008			2010			2009
Medicare		52.0	%		49.6	%		50.8	%		53.9	%
Medicaid		3.4	%		2.5	%		4.3	%		3.9	%
Commercial and other, including self-pay		44.6	%		47.9	%		44.9	%		42.2	%

Total consolidated net revenue		100.0	%		100.0	%		100.0	%		100.0	%


	Three Months Ended December 31,															Three Months Ended December 31,
										2009 Same						2010			2009			% Change
	2009			2008			% Change			Facility			% Change
Selected Operating Data (a):
Number of hospitals		8			7						7						5			5
Licensed beds (b)		658			509						588						421			421
Staffed and available beds (c)		572			463						502						380			380
Admissions (d)		7,163			6,801			5.3	%		6,938			2.0	%		4,438			4,482			(1.0	)%
Adjusted admissions (e)		10,497			9,874			6.3	%		10,043			1.7	%		6,841			6,485			5.5	%
Patient days (f)		26,352			25,181			4.7	%		25,423			1.0	%		16,254			16,672			(2.5	)%
Adjusted patient days (g)		39,336			37,044			6.2	%		37,526			1.3	%		25,143			24,324			3.4	%
Average length of stay (days) (h)		3.68			3.70			(0.5	)%		3.66			(1.1	)%		3.66			3.72			(1.4	)%
Occupancy (i)		50.1	%		59.1	%					55.0	%					46.5	%		47.7	%
Inpatient catheterization procedures (j)		3,307			3,552			(6.9	)%		3,265			(8.1	)%		1,792			1,964			(8.8	)%
Inpatient surgical procedures (k)		1,949			2,001			(2.6	)%		1,909			(4.6	)%		1,032			1,085			(4.9	)%
Hospital net revenue (in thousands except percentages)	$	142,346		$	144,225			(1.3	)%	$	137,753			(4.5	)%	$	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 is 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 is 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.


	MEDCATH CORPORATION
Dated: February 9, ~~2010~~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)