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 ~~March~~December 31, 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)

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 ~~May 6, 2010,~~February 4, 2011, there were ~~20,522,678~~20,308,070 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION

Item 1. Unaudited ~~Consolidated~~ Financial Statements

MEDCATH CORPORATION

~~MEDCATH CORPORATION~~
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


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

Current assets:
Cash and cash equivalents	$	26,113		$	31,883		$	158,475		$	33,141
Accounts receivable, net (See Note 4)		64,375			58,913
Accounts receivable, net								44,795			43,811
Income tax receivable		699			—			—			6,188
Medical supplies		15,779			15,459			10,644			10,550
Deferred income tax assets		11,783			12,161			7,815			13,247
Prepaid expenses and other current assets		15,016			13,471			12,902			13,453
Current assets of discontinued operations		25,071			44,978			57,345			47,920

Total current assets		158,836			176,865			291,976			168,310
Property and equipment, net (See Note 13)		320,366			341,394
Investments in affiliates		9,773			14,055
Property and equipment, net								176,885			182,222
Other assets		7,449			10,785			11,652			24,716
Non-current assets of discontinued operations		46,762			47,349			1,232			119,290

Total assets	$	543,186		$	590,448		$	481,745		$	494,538


Current liabilities:
Accounts payable	$	36,221		$	35,920		$	19,957		$	15,716
Income tax payable		—			297			14,316			—
Accrued compensation and benefits		18,505			16,118			11,705			16,418
Other accrued liabilities		17,253			23,277			21,073			16,663
Current portion of long-term debt and obligations under capital leases		18,081			21,187			61,573			16,672
Current liabilities of discontinued operations		17,498			19,832			17,014			35,044

Total current liabilities		107,558			116,631			145,638			100,513
Long-term debt		60,000			66,563			—			52,500
Obligations under capital leases		8,527			4,596			5,822			6,500
Deferred income tax liabilities		6,239			13,874
Other long-term obligations		5,660			8,533			3,883			5,053
Long-term liabilities of discontinued operations		36,020			35,721			—			35,968

Total liabilities		224,004			245,918			155,343			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest (See Note 1)		5,162			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; 22,477,039 issued and 20,522,678 outstanding at March 31, 2010 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		456,523			455,259			457,952			457,725
Accumulated deficit		(105,286	)		(91,420	)		(102,752	)		(139,791	)
Accumulated other comprehensive loss		(328	)		(360	)		—			(444	)
Treasury stock, at cost; 1,954,361 shares at March 31, 2010 1,954,361 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		306,328			318,898			310,619			272,909
Noncontrolling interest		7,692			18,184			9,971			9,561

Total equity		314,020			337,082			320,590			282,470

Total liabilities and equity	$	543,186		$	590,448		$	481,745		$	494,538

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

Three Months Ended March 31, Six Months Ended March 31,
2010 2009 2010 2009

Net revenue $ 134,909 $ 130,767 $ 258,967 $ 256,822
Operating expenses:
Personnel expense 46,444 44,662 91,508 88,029
Medical supplies expense 36,849 35,120 71,747 69,357
Bad debt expense 11,918 8,798 22,599 18,392
Other operating expenses 29,743 27,342 59,355 54,502
Pre-opening expenses — 380 866 587
Depreciation 7,768 6,217 15,418 12,713
Amortization 8 8 16 16
Impairment of property and equipment 19,948 — 19,948 —
(Gain) loss on disposal of property, equipment and other assets (76 ) 108 19 181

Total operating expenses 152,602 122,635 281,476 243,777

(Loss) Income from operations (17,693 ) 8,132 (22,509 ) 13,045
Other income (expenses):
Interest expense (1,149 ) (581 ) (2,207 ) (2,678 )
Loss on early extinguishment of debt — 259 — (6,702 )
Interest and other income 23 73 93 172
Loss on note receiveable (1,507 ) — (1,507 ) —
Equity in net earnings of unconsolidated affiliates 3,092 2,714 4,608 4,779

Total other income (expense), net 459 2,465 987 (4,429 )

(Loss) income from continuing operations before income taxes (17,234 ) 10,597 (21,522 ) 8,616
Income tax (benefit) expense (7,386 ) 2,610 (9,287 ) 1,115

(Loss) income from continuing operations (9,848 ) 7,987 (12,235 ) 7,501
Income from discontinued operations, net of taxes 1,163 2,060 1,733 7,915

Net (loss) income (8,685 ) 10,047 (10,502 ) 15,416
Less: Net income attributable to noncontrolling interest (2,524 ) (4,465 ) (3,364 ) (7,588 )

Net (loss) income attributable to MedCath Corporation $ (11,209 ) $ 5,582 $ (13,866 ) $ 7,828

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (11,999 ) $ 4,220 $ (15,091 ) $ 1,685
Income from discontinued operations, net of taxes 790 1,362 1,225 6,143

Net (loss) income $ (11,209 ) $ 5,582 $ (13,866 ) $ 7,828

(Loss) earnings per share, basic
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders $ (0.61 ) $ 0.21 $ (0.76 ) $ 0.09
Income from discontinued operations attributable to MedCath
Corporation common stockholders 0.04 0.07 0.06 0.31

(Loss) earnings per share, basic $ (0.57 ) $ 0.28 $ (0.70 ) $ 0.40

(Loss) earnings per share, diluted
(Loss) income from continuing operations attributable to MedCath
Corporation common stockholders $ (0.61 ) $ 0.21 $ (0.76 ) $ 0.09
Income from discontinued operations attributable to MedCath
Corporation common stockholders 0.04 0.07 0.06 0.31

(Loss) earnings per share, diluted $ (0.57 ) $ 0.28 $ (0.70 ) $ 0.40

Weighted average number of shares, basic 19,829 19,664 19,786 19,631
Dilutive effect of stock options and restricted stock — 26 — —

Weighted average number of shares, diluted 19,829 19,690 19,786 19,631

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

~~MEDCATH CORPORATION~~
~~CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY~~
~~(In thousands)~~
~~(Unaudited)~~

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

Balance, September 30, 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 399 — 1,404 — — — — — 1,404 —
Tax withholdings for vested restricted stock awards (27 ) — (253 ) — — — — — (253 ) —
Distributions to noncontrolling interest — — — — — — — (12,641 ) (12,641 ) (3,560 )

Acquisitions and other transactions impacting noncontrolling interest — — — — — — — 40 40 (8 )
Sale of equity interest — — 113 — — — — 27 140 —
Comprehensive loss:
Net loss — — — (13,866 ) — — — 2,082 (11,784 ) 1,282
Change in fair value of interest rate swap, net of income tax benefit (*) — — — — 32 — — — 32 —

Total comprehensive loss (11,752 ) 1,282

Balance, March 31, 2010 22,477 $ 216 $ 456,523 $ (105,286 ) $ (328 ) 1,954 $ (44,797 ) $ 7,692 $ 314,020 $ 5,162


~~(*)~~		~~Tax benefits were $22 for the six months ended March 31, 2010.~~

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 STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


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

Balance, September 30, 2010		22,424		$	216	$	457,725		$	(139,791	)	$	(444	)		1,954	$	(44,797	)	$	9,561		$	282,470		$	11,534
Share based compensation		—			—		1,932			—			—			—		—			—			1,932			—
Tax withholdings for vested restricted stock awards		(162	)		—		(1,705	)		—			—			—		—			—			(1,705	)		—
Distributions to noncontrolling interest		—			—		—			—			—			—		—			(7,568	)		(7,568	)		(3,560	)
Other transactions impacting noncontrolling interest					—		—			—			—			—		—			45			45			45
Exercise of call of noncontrolling interest		—			—		—			—			—			—		—			—			—			(5,700	)
Comprehensive loss:
Net income		—			—		—			37,039			—			—		—			7,933			44,972			3,493
Reclassification of amounts included in net income, net of tax benefit (*)		—			—		—			—			444			—		—			—			444			—

Total comprehensive income																								45,416			3,493

Balance, December 31, 2010		22,262		$	216	$	457,952		$	(102,752	)	$	—			1,954	$	(44,797	)	$	9,971		$	320,590		$	5,812


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

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended March 31,						Three Months Ended December 31,
	2010			2009			2010			2009
Net (loss) income	$	(10,502	)	$	15,416
Net income (loss)							$	48,465		$	(1,815	)
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations, net of taxes		(1,733	)		(7,915	)
(Income) loss from discontinued operations, net of taxes								(39,128	)		1,130
Bad debt expense		22,599			18,392			9,709			7,506
Depreciation		15,418			12,713			4,887			5,938
Amortization		16			16
Gain on sale of unconsolidated investees								(15,391	)		—
Loss on disposal of property, equipment and other assets		19			181			93			96
Share-based compensation expense		1,826			1,837			1,932			608
Loss on early extinguishment of debt		—			6,702
Amortization of loan acquisition costs		498			525			313			252
Impairment of property and equipment		19,948			—
Impairment of equity method investment		114			—
Equity in earnings of unconsolidated affiliates, net of distributions received		3,785			2,176			(84	)		6,217
Deferred income taxes		(7,701	)		(1	)		1,085			(103	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(28,061	)		(23,528	)		(10,693	)		(12,106	)
Medical supplies		(320	)		(1,970	)		(94	)		(73	)
Prepaid and other assets		(1,902	)		1,720			2,266			(3,088	)
Accounts payable and accrued liabilities		1,125			5,545			(2,825	)		(2,523	)

Net cash provided by operating activities of continuing operations		15,129			31,809			535			2,039
Net cash provided by operating activities of discontinued operations		3,779			2,986
Net cash (used in) provided by operating activities of discontinued operations								(5,131	)		1,496

Net cash provided by operating activities		18,908			34,795
Net cash (used in) provided by operating activities								(4,596	)		3,535

Investing activities:
Purchases of property and equipment		(14,858	)		(50,052	)		(157	)		(7,532	)
Proceeds from sale of property and equipment		93			511			418			70
Sale of interest in equity method investment		436			—
Proceeds from sale of unconsolidated affiliates								31,851			—

Net cash used in investing activities of continuing operations		(14,329	)		(49,541	)
Net cash (used in) provided by investing activities of discontinued operations		(1,015	)		3,123
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		(15,344	)		(46,418	)
Net cash provided by (used in) investing activities								226,728			(9,236	)

Financing activities:
Proceeds from issuance of long-term debt		—			83,242
Repayments of long-term debt		(9,429	)		(114,710	)		(7,662	)		(5,000	)
Repayments of obligations under capital leases		(953	)		(442	)		(614	)		(454	)
Distributions to noncontrolling interest		(7,970	)		(9,685	)		(4,504	)		(6,924	)
Investment by noncontrolling interest		109			—			—			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		(18,356	)		(41,595	)		(12,933	)		(12,338	)
Net cash used in financing activities of discontinued operations		(9,025	)		(3,436	)
Net cash provided by financing activities of discontinued operations								(52,327	)		(9,083	)

Net cash used in financing activities		(27,381	)		(45,031	)		(65,260	)		(21,421	)


Net decrease in cash and cash equivalents		(23,817	)		(56,654	)
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	$	37,884		$	55,414		$	203,902		$	34,579


Cash and cash equivalents of continuing operations	$	26,113		$	42,772			158,475			20,249
Cash and cash equivalents of discontinued operations	$	11,771		$	12,642			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 March 31, 2010, the Company and its physician partners have an ownership interest in and currently 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 ~~58 of the licensed beds~~and are ~~related to the Heart Hospital of Austin (“HHA”), whose assets, liabilities,~~located in five states: Arkansas, California, Louisiana, New Mexico, and ~~operations are included within discontinued operations. See Note 3 for further discussion related to the divestiture of HHA.~~

In addition to its hospitals, the Company provides cardiovascular care services in diagnostic 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 interest in ~~the Avera Heart Hospital of South Dakota and~~ Harlingen Medical Center as of ~~March~~December 31, 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 Arizona Heart Hospital (“AzHH”), Heart Hospital of Austin (“HHA”) and TexSan Heart Hospital (“TexSan”) whose assets, liabilities, and operations are included within discontinued operations. AzHH, HHA and TexSan were sold on October 1, 2010, November 1, 2010 and December 31, 2010, respectively. The results of operations of these ~~hospitals~~entities are reported as ~~equity method investments.~~discontinued operations for all periods presented. See Note 3.

Our Strategic Options Review Process

On March 1, 2010, the Company announced that its Board of Directors had formed a Strategic Options Committee ~~composed solely of independent directors~~ to consider the sale either of the ~~Company,~~Company’s equity or the sale of its individual hospitals and other ~~assets, or~~assets. The Company retained Navigant Capital Advisors as its financial advisor to assist in this process. Since announcing the ~~sale~~exploration of ~~its interest in those assets.~~

~~Basis of Presentation~~~~— Effective October~~strategic alternatives on March 1, ~~2009,~~2010, the Company adopted a new accounting standard which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a 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. 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 that are not solely within the control of the issuer are present, classification of noncontrolling interests outside of permanent equity is required. It also requires the amounts of consolidated net income attributable to the Company and to the noncontrolling interests to be clearly identified and presented on the face of the consolidated statements of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of this accounting standard results in the cash flow impact of certainhas completed several transactions, with noncontrolling interests being classified within financing activities. Such treatment is consistent with the view that under this new accounting standard, transactions between the Company and noncontrolling interests are considered to be equity transactions. The adoption of this new accounting standard has been applied retrospectively for all periods presented.including:

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of certain of its investees’ operating agreements, to purchase some or all of the noncontrolling interests related to certain of the 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 March 31, 2010, 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 part of the Company’s equity and are carried as redeemable noncontrolling interests in equity of consolidated subsidiaries 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.

	•		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)

Basis of Presentation— The Company’s unaudited interim consolidated financial statements as of ~~March~~December 31, 2010 and for the three ~~and six~~ months ended ~~March~~December 31, 2010 and 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 ~~six~~three months ended ~~March~~December 31, 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 the provisions of the Health Care and Education Reconciliation Act of 2010 (collectively the “Health Reform Laws”) which was enacted into law during March~~ 2010. ~~The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its consolidated financial statements.~~

~~Long-Lived Assets~~— Long-lived assets, such as property, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals. 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 fiscal 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. Due to continued declines in the operating performance of those hospitals during the first six months of fiscal 2010, the Company performed impairment tests using undiscounted cash flows to determine if the carrying value of each hospital’s long-lived assets were recoverable as of March 31, 2010. The results indicated the current carrying value of the assets at those hospitals were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized impairment charges based on the amount each group of assets’ carrying value exceeded its fair value. The Company’s fair value estimates were derived from appraisals, established market values of comparable assets and internal estimates of future net cash flows. These fair value estimates could change by material amounts in subsequent periods. Many factors and assumptions can impact the estimates, including the future financial results of these hospitals, how the hospitals are operated in the future, changes in health care industry trends and regulations, and the nature and timing of the ultimate disposition of the assets. The impairments recognized do not include the costs of closing the hospitals or other future operating costs, which could be substantial. Accordingly, the ultimate net cash realized from the hospitals could be significantly less than their impaired value. See Note 13 for the impairment charges recorded to property and equipment and Note 15 for further discussions as to the Company’s determination of fair value.

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

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 Financial Accounting Standards Board (“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, a portion of noncontrolling interests 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.

~~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. See Note 14.

~~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 February 2010,~~As required under accounting principles generally accepted in the ~~Company entered into an agreement to sell certain assets and liabilities of HHA for approximately $83.6 million. The sale is currently expected to close during~~United States (“GAAP”), the ~~Company’s fourth quarter ending September 30, 2010. The~~ Company has classified the results of operations of ~~HHA~~the following entities within income from discontinued operations, net of taxes ~~for~~and the ~~three and six months ended March 31, 2010 and 2009. The~~ assets and liabilities of ~~HHA~~these entities have been classified within ~~the~~ current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance ~~sheets as~~sheets.

During November 2010, the Company entered into an agreement to sell substantially all of ~~March~~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 ~~September 30, 2009.~~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, 2010.

During September ~~2009, the MedCath Partners Division of~~2010, the Company entered into an agreement to sell its subsidiary that provided consulting and management services tailored primarily to cardiologists and cardiovascular surgeons. Such subsidiary’s operations had historically been included in the Corporate and other division. Such subsidiary was sold ~~the assets of Sun City Cardiac Center Associates (“Sun City”)~~in October 2010 for $16.9 million which resulted in a gain of $3.2 million, net of taxes. The Company has classified the results of operations of Sun City within income from discontinued operations, net of taxes for the three and six months ended March 31, 2010 and 2009.an immaterial loss.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

During ~~December 2008,~~August 2010, the ~~MedCath Partners Division~~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”)~~potential sales value of AzHH. Accordingly, the Company recognized a nominal gain on the sale for ~~$6.9~~the three months ended December 31, 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 ~~$4.0 million, net of taxes.~~$35.7 million. The ~~Company has classified the results of operations of Cape Cod within income from discontinued operations, net of taxes for the three and six months ended March 31, 2009.~~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 income from discontinued operations, net~~McKesson Technologies, Inc. (“McKesson”) whereby McKesson would employ the majority of ~~taxes for~~ the ~~three and six months ended March 31, 2010 and 2009.~~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 March 31, Six Months Ended March 31,
2010 2009 2010 2009

Net revenue $ 24,911 $ 28,273 $ 48,070 $ 57,837
Gain from sale of Cape Cod — — — 6,640
Income before income taxes 1,655 2,927 2,498 11,889
Income tax expense 492 867 765 3,974

Net income before income taxes 1,163 2,060 1,733 7,915
Less: Net income attributable to noncontrolling interest (373 ) (698 ) (508 ) (1,772 )

Net income attributable to MedCath Corporation $ 790 $ 1,362 $ 1,225 $ 6,143


	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	)


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

Cash and cash equivalents	$	11,771	$	29,818	$	45,427	$	13,889
Accounts receivable, net		9,758		11,821		11,478		23,597
Other current assets		3,542		3,339		440		10,434

Current assets of discontinued operations	$	25,071	$	44,978	$	57,345	$	47,920


Property and equipment, net	$	43,555	$	44,532	$	—	$	115,670
Other assets		3,207		2,817		1,232		3,620

Long-term assets of discontinued operations	$	46,762	$	47,349	$	1,232	$	119,290


Accounts payable	$	13,392	$	14,956	$	14,003	$	25,379
Accrued liabilities		3,907		4,820
Current portion of long-term debt and obligations under capital leases		199		56
Accrued liabilities and current portion of obligations under capital leases						3,011		9,665

Current liabilities of discontinued operations	$	17,498	$	19,832	$	17,014	$	35,044


Long-term debt	$	35,165	$	35,359
Long-term debt and obligations under capital leases					$	—	$	35,302
Other long-term obligations		855		362		—		666

Long-term liabilities of discontinued operations	$	36,020	$	35,721	$	—	$	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)

~~4. Accounts Receivable~~

~~Accounts receivable, net, consists of the following:~~

March 31, September 30,
2010 2009
Receivables, principally from patients and third-party payors $ 136,588 $ 126,577
Receivables, principally from billings to hospitals for various cardiovascular procedures 1,711 1,494
Amounts due under management contracts 193 228
Other 3,949 5,503

142,441 133,802
Less allowance for doubtful accounts (78,066 ) (74,889 )

Accounts receivable, net $ 64,375 $ 58,913

~~5. Equity Investments~~

The Company owns noncontrolling interests in the Avera Heart Hospital of South Dakota, 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. Therefore, the Company does not consolidate the results of operations and financial position of these entities, but rather accounts for its noncontrolling ownership interest in the hospitals and other ventures as equity method investments.

~~During February 2010, MedCath Partners Division of the Company sold its entire 15.0% interest in Wilmington Heart Services, LLC for $0.4 million, resulting in an immaterial loss.~~

The Company’s MedCath Partners Division currently expects to sell its entire 33.3% interest in Tri-County Heart New Jersey, LLC (“Tri- County”) for approximately $0.4 million during the Company’s third quarter ending June 30, 2010. The approximate sales price for its interest in Tri-County is $0.1 million less than the Company’s carrying value of its investment in Tri-County as of March 31, 2010. As a result of this anticipated sale, the Company recorded a $0.1 million impairment charge to equity in net earnings of unconsolidated affiliates in the consolidated statement of operations related to its investment in Tri-County during the second quarter ended March 31, 2010.

The following tables represent summarized combined financial information of the Company’s unconsolidated affiliates accounted for under the equity ~~method:~~method (For those entities in which the Company has disposed of its interest, the operating activities have been included through their respective date of disposition):


	Three Months Ended March 31,				Six Months Ended March 31,				Three Months Ended December 31,
	2010		2009		2010		2009		2010		2009

Net revenue	$	59,390	$	56,489	$	115,173	$	115,209	$	35,968	$	53,326
Income from operations	$	15,116	$	11,806	$	23,666	$	25,048	$	6,425	$	8,073
Net income	$	12,885	$	9,486	$	18,979	$	20,577	$	4,440	$	5,777

March 31, September 30,
2010 2009

Current assets $ 54,508 $ 68,174
Long-term assets $ 147,333 $ 148,993
Current liabilities $ 23,867 $ 25,770
Long-term liabilities $ 122,652 $ 122,629

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


	December 31,		September 30,
	2010		2010

Current assets	$	33,063	$	58,690
Long-term assets	$	79,092	$	144,402
Current liabilities	$	14,325	$	23,922
Long-term liabilities	$	98,848	$	121,524

6. Long-Term Debt

Long-term debt consists of the following:


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

Credit Facility	$	72,188		$	80,000
Notes payable to various lenders		4,437			6,054

		76,625			86,054
Amended Credit Facility								58,901			66,563
Less current portion		(16,625	)		(19,491	)		(58,901	)		(14,063	)

Long-term debt	$	60,000		$	66,563		$	—		$	52,500

Senior Secured Credit Facility— During November 2008, the Company amended and restated its then outstanding senior secured credit facility (the ~~“Credit~~“Amended Credit Facility”). The Amended Credit Facility provides for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit (of which $1.7 million were outstanding as of December 31, 2010 and September 30, 2010) and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the aggregate amount available under the Amended Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Amended Credit Facility, excluding swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus anthe applicable margin or the alternate base rate plus anthe applicable margin. At ~~March~~December 31, 2010 the Term Loan bore interest at ~~3.23%~~3.26%. The $58.9 million and $66.6 million outstanding under the Amended Credit Facility at December 31, 2010 and September 30, 2010, respectively, related to the Term Loan. No amounts were outstanding under the Revolver as of December 31, 2010 and September 30, 2010.

The Amended Credit Facility iscontinues to be guaranteed jointly and severally by the Company and certain of the Company’s existing and future, direct and indirect, wholly owned subsidiaries and is secured by a first priority perfected security interest in all of the capital stock or other ownership interests owned by the Company and subsidiary guarantors in each of their subsidiaries, and, subject to certain exceptions in the Amended Credit Facility, all other present and future assets and properties of the Company and the subsidiary guarantors and all intercompany notes.

The Amended Credit Facility requires compliance with certain financial covenants including a consolidated senior secured leverage ratio test, a consolidated fixed charge coverage ratio test and a consolidated total leverage ratio test. The Amended Credit Facility also contains customary restrictions on, among other things, the Company and subsidiaries’ ability to incur liens; engage in mergers, consolidations and sales of assets; incur debt; declare dividends; redeem stock and repurchase, redeem and/or repay other debt; make loans, advances and investments and acquisitions; and enter into transactions with affiliates.

The Amended Credit Facility contains events of default, including cross-defaults to certain indebtedness, change of control events, and other events of default customary for syndicated commercial credit facilities. Upon the occurrence of an event of default, the Company could be required to immediately repay all outstanding amounts under the Amended Credit Facility.

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, 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 $72.2~~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 March~~Revolver or cash collateralize letters of credit to the extent outstanding and permanently reduce the Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver will also reduce the revolving credit commitment by a corresponding amount.

In addition to the quarterly installment, during the three months ended December 31, 2010, ~~relates~~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 ~~maximum availability~~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 ~~$85.0~~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—As of December 31, 2010 and September 30, 2010, the Company was in compliance with all covenants governing its outstanding debt.

Interest Rate Swap— During the year ended September 30, 2006 one of 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 recorded its proportionate share of comprehensive income within stockholders’ equity in the consolidated balance sheets based on the Company’s ownership interest in that hospital. However, as noted in Note 5, 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 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 ~~was reduced by outstanding letters~~is included in other accrued liabilities as of ~~credit totaling $1.7 million at March~~December 31, 2010.

During ~~December 2008,~~September 2010, the Company ~~redeemed~~entered into a call agreement with the minority shareholders of one of its ~~outstanding 9 7/8% senior notes (the “Senior Notes”) issued~~hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest owned by ~~MedCath Holdings Corp., a wholly owned subsidiary~~physician investors for an amount equal to the net amount of the ~~Company, for $111.2~~physician investors unreturned capital contributions ($2.7 million ~~which included the payment of a repurchase premium of $5.0 million~~at December 31, 2010 and accrued interest of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand. In addition to the aforementioned repurchase premium, the Company incurred $2.0 million in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium and write off of previously incurred financing costs have been included in the consolidated statements of operations as loss on early extinguishment of debt for the six months ended March 31, 2009.September 30, 2010).

1012

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

~~Debt Covenants~~—At March 31, 2010 and September 30, 2009, 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 $4.4 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.

~~Fair Value of Financial Instruments~~—The Company considers the carrying amounts of significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at March 31, 2010 and September 30, 2009. The estimated fair value of long-term debt, including the current portion, at March 31, 2010 was approximately $116.4 million ($39.6 million related to discontinued operations) as compared to a carrying value of $111.2 million ($34.6 million related to discontinued operations). At September 30, 2009, the estimated fair value of long-term debt, including the current portion, was approximately $127.6 million ($41.4 million related to discontinued operations) as compared to a carrying value of $121.4 million ($39.6 million related to discontinued operations). 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 of arrangements and market information. The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

~~7. Contingencies and Commitments~~

Contingencies —The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, executive orders and freezes and funding reductions, all of which may significantly affect the Company. In addition, reimbursement is generally subject to adjustment following audit by third party payors, including commercial payors as well as the ~~fiscal intermediaries~~contractors who administer the Medicare program for the Centers for Medicare and Medicaid Services (“CMS”).

Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. The Company believes that adequate provisions have been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

In 2005, CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. 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 ~~March~~December 31, 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.

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

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 ~~March 31, 2010 $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.~~

~~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 ~~March~~December 31, 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 $3.1~~$2.7 million ~~and $4.5 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 ~~$4.5~~$3.0 million and ~~$3.5~~$3.3 million as of ~~March~~December 31, 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 ~~March~~December 31, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was ~~approximately $30.8~~$25.9 million through ~~October 2012.~~June 2013. At ~~March~~December 31, 2010 the Company had total liabilities of ~~$13.1~~$9.8 million for the fair value of these guarantees, of which ~~$8.3~~$6.6 million is in other accrued liabilities and ~~$4.8~~$3.2 million is in other long term obligations. Additionally, the Company had assets of ~~$13.1~~$10.2 million representing the future services to be provided by the physicians, of which ~~$8.2~~$6.5 million is in prepaid expenses and other current assets and ~~$4.9~~$3.7 million is in other assets.

8. ~~Earnings per~~Per Share Data

Basic— The calculation of basic earnings per share includes ~~177,400~~150,900 and ~~95,900~~101,500 of restricted stock units that have vested but as of ~~March~~December 31, 2010 and 2009, respectively, have not been converted into common stock. ~~See Note 9 as it relates to restricted stock units granted to directors of the Company.~~

Diluted— The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase ~~1,302,587~~913,812, and 986,637 shares of common stock at prices ranging from ~~$4.75~~$9.95 to $33.05, which were outstanding at ~~March~~December 31, 2010 and 2009, respectively, as well as ~~463,216~~309,405 and 782,707 shares of restricted stock which were outstanding at ~~March~~December 31, ~~2009.~~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, ~~and restricted stock 1,739,328 and 1,765,803~~897,500 options have not been included in the calculation of diluted earnings per share ~~for the three and six months ended March~~at December 31, ~~2009, respectively,~~2010 because ~~the stock~~these options ~~and restricted stock~~ were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share ~~for the three and six months ended March~~at December 31, ~~2010,~~2009, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

1214

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

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors isare recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company estimates the fair value of equity awards on the date of grant using, either an option-pricing model for stock options or the closing market price of the Company’s stock for restricted stock and restricted stock units. Stock based compensation expense is recognized on a straight-line basis over the requisite service period for the awards that are ultimately expected to vest. Stock based compensation expense recorded during the three ~~and six~~ months ended ~~March~~December 31, 2010 and 2009 was ~~$1.2~~$1.9 million and ~~$1.8~~$0.6 million, respectively. The associated tax benefits related to the compensation expense recognized for the three ~~and six~~ months ended ~~March~~December 31, 2010 ~~was $0.5 million~~ and ~~$0.7 million, respectively. Stock based compensation expense recorded during the three and six months ended March 31,~~ 2009 was $0.8 million and ~~$1.8 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and six months ended March 31, 2009 was $0.3 million and $0.7~~$0.2 million, respectively.

Stock Options

The following table summarizes the Company’s stock option activity:

For the Three Months Ended
March 31, 2010 March 31, 2009
Weighted- Weighted-
Number of Average Number of Average
Stock Options Exercise Price Stock Options Exercise Price
Outstanding stock options, beginning of period 986,637 $ 22.23 1,825,837 $ 21.98

Cancelled (11,000 ) 29.49 (523,250 ) 22.93

Outstanding stock options, end of period 975,637 $ 22.14 1,302,587 $ 21.60


	For the Six Months Ended										For the Three Months Ended
	March 31, 2010					March 31, 2009					December 31, 2010					December 31, 2009
				Weighted-					Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		1,027,387		$	22.25		1,776,837		$	22.15		932,137		$	21.89		1,027,387		$	22.25

Granted		—			—		82,000			17.46		—			—		—			—
Cancelled		(51,750	)		24.33		(556,250	)		22.74		(18,325	)		21.81		(40,750	)		22.94


Outstanding stock options, end of period		975,637		$	22.14		1,302,587		$	21.60		913,812		$	21.89		986,637		$	22.23

There were no grants of restricted stock during the three months ended December 31, 2010. During the three ~~and six~~ months ended ~~March 31, 2010, the Company granted to employees 32,235 and 401,399 shares of restricted stock, respectively. During the three and six months ended March~~December 31, 2009, the Company granted to employees ~~424,153~~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~~defined by the Company as vice president or ~~higher)~~higher, received two equal grants of restricted stock. The first grant vests annually in ~~equal installments on~~ December 31of each year over a three year period. The second grant vests annually onin December 31of each year, over a three year period if certain performance conditions are met. ~~During the three and six months ended March 31, 2010,~~All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company ~~granted 89,600 shares of restricted stock units to directors. During~~as defined in the ~~three~~Company’s 2006 Stock Option and six months ended March 31, 2009, the Company granted 95,900 shares of restricted stock units to directors. Restricted stock units granted to directors are fully vested at the date of grant and are paid in shares of common stock upon each applicable director’s termination of service on the board.Award Plan. At ~~March~~December 31, 2010 the Company had ~~$4.8~~$1.8 million of unrecognized compensation expense associated with restricted stock awards.

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

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

For the Three Months Ended
March 31, 2010 March 31, 2009
Number of Number of
Restricted Weighted- Restricted Weighted-
Stock Awards Average Stock Awards Average
and Units Grant Price and Units Grant Price
Outstanding restricted stock awards and units, beginning of period 923,270 $ 8.54 39,063 $ 20.50

Granted 121,835 8.01 520,053 8.94
Vested (13,700 ) 7.33 — —
Cancelled (5,705 ) 9.21 — —

Outstanding restricted stock awards and units, end of period 1,025,700 $ 8.49 559,116 $ 9.74


	For the Six Months Ended										For the Three Months Ended
	March 31, 2010					March 31, 2009					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		490,999			7.24		520,053			8.94		—			—		369,164			6.99
Vested		(103,895	)		9.04		(52,106	)		20.50		(423,980	)		9.42		(90,195	)		9.30
Cancelled		(15,731	)		9.10		(32,813	)		15.88		—			—		(10,026	)		9.03


Outstanding restricted stock awards and units, end of period		1,025,700		$	8.49		559,116		$	9.74		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)

10. Reportable Segment Information

The Company’s reportable segments consist of the Hospital Division and the MedCath Partners Division.

Financial information concerning the Company’s operations by each of the reportable segments as of and for the periods indicated is as follows:

Three Months Ended March 31, Six Months Ended March 31,
2010 2009 2010 2009

Net revenue:
Hospital Division $ 131,619 $ 126,045 $ 251,752 $ 247,131
MedCath Partners Division 3,180 4,619 6,993 9,490
Corporate and other 110 103 222 201

Consolidated totals $ 134,909 $ 130,767 $ 258,967 $ 256,822

(Loss) income from operations:
Hospital Division $ (13,985 ) $ 10,855 $ (16,078 ) $ 18,575
MedCath Partners Division (322 ) (380 ) (575 ) (484 )
Corporate and other (3,386 ) (2,343 ) (5,856 ) (5,046 )

Consolidated totals $ (17,693 ) $ 8,132 $ (22,509 ) $ 13,045


					Three Months Ended December 31,
					2010			2009

Net revenue:
Hospital Division					$	86,618		$	84,382
MedCath Partners Division						2,228			3,336
Corporate and other						54			112

Consolidated totals					$	88,900		$	87,830


Income (loss) from operations:
Hospital Division					$	4,005		$	(16	)
MedCath Partners Division						44			(175	)
Corporate and other						(5,630	)		(2,472	)

Consolidated totals					$	(1,581	)	$	(2,663	)


	March 31,		September 30,		December 31,			September 30,
	2010		2009		2010			2010
Aggregate identifiable assets:
Hospital Division	$	476,611	$	517,849	$	296,226		$	414,656
MedCath Partners Division		26,736		27,205		11,401			20,210
Corporate and other		39,839		45,394		174,118			59,672

Consolidated totals	$	543,186	$	590,448	$	481,745		$	494,538

Substantially all of the Company’s net revenue in its Hospital Division and MedCath Partners Division is derived directly or indirectly from patient services. The amounts presented for corporate and other primarily include general overhead and administrative expenses and financing activities as components of (loss) income from operations and certain cash and cash equivalents, prepaid expenses, other assets and operations of the business not subject to separate segment reporting within identifiable assets.

Change in Ownership Due to Cancellation of Stock Subscription Receivable —Upon the formation of Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements whereby they paid for their ownership in two installments. At the date of formation, the amount due from the minority owners was recorded as a stock subscription receivable. During the fourth quarter of fiscal 2010, several minority owners did not submit the final installment. As ~~of March 31, 2010~~a result, and ~~September 30, 2009,~~per the partnership operating agreement, the proportionate ownership was transferred to the Company and the stock subscription receivable was reduced accordingly. As a result, the Company’s ~~intangible assets, which are included~~ownership in ~~other assets on the consolidated balance sheets, are detailed in the following table:~~

March 31, 2010 September 30, 2009
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Intangible Assets $ 555 $ (242 ) $ 730 $ (352 )

~~The estimated aggregate amortization expense for each of the next five year periods ending March 31 are $57 for fiscal 2010, $51 for fiscal 2011, and $32 for fiscal 2012, 2013, and 2014.~~

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~HMMC increased from 79.00% to 82.49%.

12. ~~Comprehensive Income~~

Three Months Ended March 31, Six Months Ended March 31,
2010 2009 2010 2009
Net (loss) income $ (8,685 ) $ 10,047 $ (10,502 ) $ 15,416
Changes in fair value of interest rate swap, net of tax benefit (24 ) 175 32 (273 )

Comprehensive (loss) income (8,709 ) 10,222 (10,470 ) 15,143
Less: Net income attributable to noncontrolling interest (2,524 ) (4,465 ) (3,364 ) (7,588 )

Comprehensive (loss) income attributable to MedCath Corporation common stockholders $ (11,233 ) $ 5,757 $ (13,834 ) $ 7,555

~~13.~~ Property and Equipment

March 31, September 30,
2010 2009

Land $ 33,705 $ 32,629
Buildings 251,620 263,796
Equipment 227,675 217,362
Construction in progress 6,723 17,434

Total, at cost 519,723 531,221
Less accumulated depreciation (199,357 ) (189,827 )

Property and equipment, net $ 320,366 $ 341,394

The Company recorded $19.9 million of impairment charges to the consolidated statement of operations during the second quarter ended March 31, 2010. See Note 1 for further discussion related to these impairment charges.

~~14. Other Assets~~

The Company’s corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to the Company’s determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note.


	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

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

~~15.~~13. Fair Value Measurements

~~As described in Note 2~~~~Recent Accounting Pronouncements~~the Company adopted the accounting standard issued by the FASB that defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements. The ~~FASB delayed the effective date of this new standard for all nonfinancial~~Company’s non-financial assets and liabilities ~~whose fair values are measured on a nonrecurring basis, typically relate to long-lived assets. The Company is now~~not permitted or required to ~~provide additional disclosures about fair value measurements for each major category of assets and liabilities~~be measured at fair value on a ~~non-recurring basis. The following table presents this information as of March 31, 2010~~recurring basis typically relate to long-lived assets held and ~~indicates the fair value hierarchy of the valuation techniques utilized to determine such fair values.~~used and long-lived assets held for sale (including investments in affiliates). Fair values are determined by 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. Fair values determined by Level 2 inputs utilize data points that are observable, such as appraisals or established market values of comparable assets. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of future cash flows.

Significant
Significant Other Unobservable
March 31, Observable Inputs Inputs Total
2010 (Level 2) (Level 3) Impairments
Long-lived assets held and used (1) $ 78,899 $ 32,000 $ 46,899 $ (19,948 )
Investment in Affiliates (2) 400 400 — (114 )

$ 79,299 $ 32,400 $ 46,899 $ (20,062 )


~~(1)~~		~~See Notes 1 and 13~~

~~(2)~~	•		~~See Note 5~~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 significant classes of financial instruments on the consolidated balance sheets to be reasonable estimates of fair value due either to their length to maturity or the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at December 31, 2010 and September 30, 2010. Based on Level 3 inputs, the fair value of long-term debt, including the current portion, at December 31, 2010 approximates the carrying value. Based on Level 3 inputs, the fair value of long-term debt, including the current portion, at September 30, 2010 was $108.1 million ($41.5 million related to discontinued operations) as compared to carrying values of $101.2 million ($34.6 million related to discontinued operations). The fair value of the Company’s variable rate debt was determined to approximate its carrying value due to the underlying variable interest rates.

The Company’s cash equivalents are measured utilizing Level 1 or Level 2 inputs.

14. Subsequent Events

On January 1, 2011, MedCath Partners sold its investment in one of its investments accounted for under the equity method for $0.6 million.

On January 5, 2011, the Company made a principal repayment of $20.6 million using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million at that date.

In January 2011, the Company obtained from its noncontrolling members of one of its hospitals, the right to sell all or substantially all of the assets of that hospital. Concurrent with the granting of such right and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in the hospital. The approval, consent and proxy allows the Company to sell all or substantially all of the assets of that hospital and the Company will pay to the noncontrolling members the net amount of their unreturned capital contributions ($3.0 million at December 31, 2010) adjusted upward for any proportionate share of additional proceeds upon a disposition transaction.

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 licensed beds, 58 of which are related to HHA, whose assets, liabilities, and operations are included within discontinued operations. Our nine hospitals, which currently comprise our continuing operations, have 767533 licensed beds, of which ~~677~~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 14seven cardiac diagnostic and therapeutic facilities. ~~Nine~~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 ~~five 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.”

Pursuant to a favorable regulatory settlement (“Settlement Agreement”) that MedCath entered into on August 14, 1995 with the State of North Carolina Department of Human Resources (now known as the Division of Health Service Regulation (“DHSR”)), MedCath obtained authority to operate nine cardiac catheterization laboratories within the state of North Carolina. The rights under the Settlement Agreement were subsequently assigned to MedCath Partners in connection with a reorganization by MedCath. The Settlement Agreement allows MedCath Partners to operate these catheterization labs anywhere in North Carolina without a need for further state review, with some exceptions. No certificate of need (“CON”) is required for MedCath Partners to operate any one of these nine diagnostic or interventional laboratories in the state. MedCath Partners is required to comply with certain notice requirements for replacement of any equipment in these laboratories and has historically notified the DHSR when MedCath Partners is changing the location of any laboratories located within the State. However, the DHSR takes the position that MedCath Partners must own and provide the services of the equipment which comprises each laboratory — the CON exemption applies only when MedCath Partners is operating one of these specific nine laboratories.

On March 1, 2010, ~~the Company~~we announced that ~~its~~our Board of Directors had formed a Strategic Options Committee ~~composed solely of independent directors~~ to consider the sale either of the Company or the sale of ~~its~~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 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 ~~sale~~strategic options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of ~~its interest~~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 ~~those assets.~~the context of a dissolution, and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

~~Same Facility Hospitals.~~~~Our policy~~Many unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic options process, we are unable to ~~include, on a same facility basis, only those facilities~~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~~other expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed and ~~six months ended March 31, 2010, we exclude the results of operations of Hualapai Mountain Medical Center, which opened in October 2009.~~any required reserves to address liabilities, including retained and contingent liabilities and/or other unforeseen events.

Revenue Sources by Division.The largest percentage of our net revenue is attributable to our ~~Hospital Division.~~hospital division. The following table sets forth the percentage contribution of each of our consolidating divisions to consolidated net revenue in the periods indicated below.


	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended December 31,
Division	2010			2009			2010			2009			2010			2009
Hospital		97.6	%		96.4	%		97.2	%		96.2	%		97.4	%		96.1	%
MedCath Partners		2.3	%		3.5	%		2.7	%		3.7	%		2.5	%		3.8	%
Corporate and other		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Revenue Sources by Payor.We receive payments for our services rendered to patients from the Medicare and Medicaid programs, commercial insurers, health maintenance organizations and our patients directly. ~~Generally, our~~Our net revenue is ~~determined~~impacted by a number of factors, including the payor mix, the number and nature of procedures performed and the rate of payment for the procedures. Since cardiovascular disease disproportionately affects those age 55 and older, the proportion of net revenue we derive from the Medicare program is higher than that of most general acute care hospitals. The following table sets forth the percentage of consolidated net revenue we earned by category of admitting payor in the periods indicated.


	Three Months Ended March 31,						Six Months Ended March 31,						Three Months Ended December 31,
Payor	2010			2009			2010			2009			2010			2009
Medicare		55.4	%		57.5	%		54.2	%		53.3	%		50.8	%		53.9	%
Medicaid		4.2	%		5.2	%		4.2	%		3.9	%		4.3	%		3.9	%
Commercial and other, including self-pay		40.4	%		37.3	%		41.6	%		42.8	%		44.9	%		42.2	%

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

A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive from the Medicare program as a percentage of total consolidated net revenue towill remain significant in future periods. Our payor mix may fluctuate in future periods due to changes in reimbursement, market and industry trends with self-pay patients, and other similar factors.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, ~~(such as the recent Health Reform Laws),~~ retroactive and prospective rate adjustments, administrative rulings, court decisions, audits, investigations, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment and possible recoupment following audit by all third party payors, including commercial payors and the ~~fiscal 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 ~~March~~December 31, 2010 Compared to Three Months Ended ~~March~~December 31, 2009

Statement of Operations Data.The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 134,909 $ 130,767 $ 4,142 3.2 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 46,444 44,662 1,782 4.0 % 34.4 % 34.2 %
Medical supplies expense 36,849 35,120 1,729 4.9 % 27.3 % 26.9 %
Bad debt expense 11,918 8,798 3,120 35.5 % 8.9 % 6.7 %
Other operating expenses 29,743 27,342 2,401 8.8 % 22.0 % 20.9 %
Pre-opening expenses — 380 (380 ) (100.0 )% — 0.3 %
Depreciation 7,768 6,217 1,551 24.9 % 5.8 % 4.7 %
Amortization 8 8 — — — 0.0 %
Impairment of property and equipment 19,948 — 19,948 100.0 % 14.8 % —
(Gain) loss on disposal of property, equipment and other assets (76 ) 108 (184 ) (170.4 )% — 0.1 %

(Loss) income from operations (17,693 ) 8,132 (25,825 ) (317.6 )% (13.2 )% 6.2 %
Other income (expenses):
Interest expense (1,149 ) (581 ) 568 97.8 % (0.8 )% (0.4 )%
Loss on early extinguishment of debt — 259 (259 ) (100.0 )% — 0.2 %
Interest and other income 23 73 (50 ) (68.5 )% 0.0 % 0.1 %
Loss on note receiveable (1,507 ) — (1,507 ) (100.0 )% (1.1 )% —
Equity in net earnings of unconsolidated affiliates 3,092 2,714 378 13.9 % 2.3 % 2.1 %

(Loss) income from continuing operations before income taxes (17,234 ) 10,597 (27,831 ) (262.6 )% (12.8 )% 8.1 %
Income tax (benefit) expense (7,386 ) 2,610 (9,996 ) (383.0 )% (5.5 )% 2.0 %

(Loss) income from continuing operations (9,848 ) 7,987 (17,835 ) (223.3 )% (7.3 )% 6.1 %
Income from discontinued operations, net of taxes 1,163 2,060 (897 ) (43.5 )% 0.9 % 1.6 %

Net (loss) income (8,685 ) 10,047 (18,732 ) (186.4 )% (6.4 )% 7.7 %
Less: Net income attributable to noncontrolling interest (2,524 ) (4,465 ) (1,941 ) (43.5 )% (1.9 )% (3.4 )%

Net (loss) income attributable to MedCath Corporation $ (11,209 ) $ 5,582 $ (16,791 ) (300.8 )% (8.3 )% 4.3 %

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (11,999 ) $ 4,220 $ (16,219 ) (384.3 )% (8.9 )% 3.2 %
Income from discontinued operations, net of taxes 790 1,362 (572 ) (42.0 )% 0.6 % 1.1 %

Net (loss) income $ (11,209 ) $ 5,582 $ (16,791 ) (300.8 )% (8.3 )% 4.3 %

HMMC, which is located in Kingman, AZ, opened in October 2009. For comparison purposes, the selected operating data below are presented on an actual consolidated basis and on a same facility basis for the periods indicated. Same facility basis excludes HMMC from operations for the three and six months ended March 31, 2010.


				Three Months Ended December 31,
	(in thousands except percentages)
							Increase/
							(Decrease)			% of Net Revenue
	2010			2009			%			2010			2009
Net revenue	$	88,900		$	87,830			1.2	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		32,454			31,636			2.6	%		36.5	%		36.0	%
Medical supplies expense		19,222			22,107			(13.1	)%		21.6	%		25.2	%
Bad debt expense		9,709			7,506			29.3	%		10.9	%		8.5	%
Other operating expenses		24,116			22,344			7.9	%		27.1	%		25.4	%
Pre-opening expenses		—			866			(100.0	)%		—			1.0	%
Depreciation		4,887			5,938			(17.7	)%		5.5	%		6.8	%
Loss on disposal of property, equipment and other assets		93			96			(3.1	)%		0.1	%		0.2	%

Loss from operations		(1,581	)		(2,663	)		(40.6	)%		(1.8	)%		(3.0	)%
Other income (expenses):
Interest expense		(1,082	)		(945	)		(14.5	)%		(1.2	)%		(1.1	)%
Interest and other income, net		489			70			(598.6	)%		0.6	%		0.1	%
Gain on sale of unconsolidated affiliates		15,391			—			N/M			17.3	%		—
Equity in net earnings of unconsolidated affiliates		602			1,516			(60.3	)%		0.7	%		1.6	%

Income (loss) from continuing operations before income taxes		13,819			(2,022	)		(783.4	)%		15.6	%		(2.3	)%
Income tax expense (benefit)		4,482			(1,337	)		(435.2	)%		5.0	%		(1.5	)%

Income (loss) from continuing operations		9,337			(685	)		(1463.1	)%		10.5	%		(0.8	)%
Income (loss) from discontinued operations, net of taxes		39,128			(1,130	)		(3562.7	)%		44.0	%		(1.3	)%

Net income (loss)		48,465			(1,815	)		(2770.2	)%		54.5	%		(2.1	)%
Less: Net income attributable to noncontrolling interest		(11,426	)		(841	)		1258.6	%		(12.9	)%		(1.0	)%

Net income (loss) attributable to MedCath Corporation	$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%


Amounts attributable to MedCath Corporation common stockholders:
Income (loss) from continuing operations, net of taxes	$	7,162		$	(1,902	)		(476.6	)%		8.1	%		(2.2	)%
Income (loss) from discontinued operations, net of taxes		29,877			(754	)		(4062.5	)%		33.6	%		(0.9	)%

Net income (loss)	$	37,039		$	(2,656	)		(1494.5	)%		41.7	%		(3.0	)%

Three Months Ended March 31,
2010 Same
2010 2009 % Change Facility % Change

Selected Operating Data (a):

Number of hospitals 7 6 6
Licensed beds (b) 600 451 530
Staffed and available beds (c) 514 404 444
Admissions (d) 6,650 6,199 7.3 % 6,191 (0.1 )%
Adjusted admissions (e) 9,884 8,812 12.2 % 9,058 2.8 %
Patient days (f) 25,368 24,810 2.2 % 23,531 (5.2 )%
Adjusted patient days (g) 37,156 34,941 6.3 % 33,940 (2.9 )%
Average length of stay (days) (h) 3.81 4.00 (4.8 )% 3.80 (5.0 )%
Occupancy (i) 54.8 % 68.2 % 58.9 %
Inpatient catheterization procedures (j) 3,028 3,077 (1.6 )% 2,940 (4.5 )%
Inpatient surgical procedures (k) 1,876 1,842 1.8 % 1,786 (3.0 )%
Hospital net revenue (in thousands except percentages) $ 130,645 $ 125,652 4.0 % $ 123,386 (1.8 )%
The following table presents selected operating data on a consolidated basis for the periods indicated:


	Three Months Ended December 31,
	2010			2009			% Change

Selected Operating Data (a):
Number of hospitals		5			5
Licensed beds (b)		421			421
Staffed and available beds (c)		380			380
Admissions (d)		4,438			4,482			(1.0	)%
Adjusted admissions (e)		6,841			6,485			5.5	%
Patient days (f)		16,254			16,672			(2.5	)%
Adjusted patient days (g)		25,143			24,324			3.4	%
Average length of stay (days) (h)		3.66			3.72			(1.4	)%
Occupancy (i)		46.5	%		47.7	%
Inpatient catheterization procedures (j)		1,792			1,964			(8.8	)%
Inpatient surgical procedures (k)		1,032			1,085			(4.9	)%
Hospital net revenue (in thousands except percentages)	$	86,618		$	84,382			2.6	%


(a)		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

(b)		Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.

(c)		Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.

(d)		Admissions represent the number of patients admitted for inpatient treatment.

(e)		Adjusted admissions ~~are~~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 ~~are~~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.

Net Revenue.Our consolidated net revenue increased ~~3.2%~~1.2% or ~~$4.1~~$1.1 million to ~~$134.9~~$88.9 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$130.8~~$87.8 million for the ~~second~~first quarter of fiscal ~~2009.~~2010. Hospital Division net revenue increased ~~4.4%~~2.6%, or ~~$5.6~~$2.2 million, for the ~~second~~first quarter of fiscal ~~2010~~2011 compared to the same period of fiscal 2009. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts. As a result, certain expenses once incurred by our MedCath Partners Division and reimbursed, are no longer being billed nor incurred by our MedCath Partners Division.2010. There was a ~~$0.5~~$1.1 million decrease in net revenue in our MedCath Partners ~~Division as well as a $0.5 million reduction in expenses due to this billing change. Net revenue on a same facility basis was as follows:~~

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 127,651 $ 130,767 $ (3,116 ) (2.4 )% 100.0 % 100.0 %
Division.

~~Same facility inpatient~~Inpatient net revenue was ~~72.3%~~69% of the Hospital Division’s ~~total same facility~~ net patient revenue for the ~~second~~first quarter of fiscal 2011 compared to 71% for the first quarter of fiscal 2010. Our total inpatient net revenue and cases decreased 3.4% and 2.0%, respectively during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, ~~compared~~whereas outpatient net revenue and cases increased 9.3% and 31.5%, respectively during the same period.

The decrease in inpatient net revenue is due to ~~73.8% for~~a 6.5% decline in our core cardiovascular cases offset by an 8.0% increase in our non-cardiovascular cases. Hualapai Mountain Medical Center, (“HMMC”), our newest hospital which began operations during the ~~second quarter of fiscal 2009. Although inpatient cases for the second~~first quarter of fiscal 2010, ~~remained relatively flat,~~is a general acute care facility so it contributed to the increase in our ~~total inpatient net revenue declined 3.8% as a result of a decline in~~non-cardiovascular procedures ~~with higher net revenue per case such as open heart and AICD procedures. Inpatient open heart and AICD net revenues were down 9.3% and 25.8%, respectively, during~~for the ~~second~~first quarter of fiscal 2010 as compared to the comparable period. We believe the decline is indicative that less invasive cardiac procedures, such as stents, and pharmaceutical treatments have been increasingly successful in treating patients suffering from cardiovascular disease. In addition, we experienced a 20.4% reduction in inpatient bare metal stent net revenue. Our other inpatient catheterization procedures (excluding stent procedures) increased 29.4%, which offset these declines.

Outpatient cases, excluding emergency department cases, and net revenue increased 2.1% and 5.0%, respectively for the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009. The increase in outpatient cases and net revenue was due to an increase in outpatient AICD implants, pacer implants and EP studies/ablations, which experienced a 45.5% increase in net revenue and a 21.5% increase in cases. Emergency department visits increased 10.7% while emergency department net revenue remained flat during the second quarter of fiscal 20102011 compared to the same period of the prior ~~year~~year. HMMC’s inpatient cases increased 106% due to the ramp up of the facility. HMMC also contributed to the increase in outpatient cases and net revenue, particularly related to emergency department cases.

Excluding HMMC from both the first quarter of fiscal 2011 and 2010 (“same facility” basis), inpatient net revenue decreased $2.4 million, or 4.1%, and outpatient net revenue increased $1.1 million, or 5.0%, for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Our same facility inpatient net revenue decrease is due to the mix of ~~the~~ procedures performed. We performed fewer procedures with higher reimbursement during the first quarter of fiscal 2011 compared to the same period of the prior year. Our same facility outpatient revenue increase is due to a 7.1% increase in same facility outpatient cases, particularly emergency department cases, due to the expansion at several of our facilities and more procedures being performed in an outpatient setting.

~~Same facility net~~Net revenue for the ~~second~~first quarter of fiscal ~~2010~~2011 included charity care deductions of ~~$2.0~~$2.1 million compared to charity care deductions of ~~$1.6~~$1.9 million for the ~~second~~first quarter of fiscal ~~2009.~~2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.~~Our consolidated personnel~~Personnel expense increased ~~4.0%~~2.6%, or $0.9 million, to ~~$46.4~~$32.5 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$44.7~~$31.6 million for the ~~second~~first quarter of fiscal ~~2009. Personnel expense on a same facility basis was as follows:~~

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Personnel expense $ 42,374 $ 44,662 $ (2,288 ) (5.1 )% 33.2 % 34.2 %
2010.

The ~~$2.3 million reduction~~increase in ~~same facility~~ personnel expense was primarily due to a $1.4 million reduction in temporary contract labor and a $1.8 million reduction in other salaries and wages. Personnel expense continues to decline as we focus on efforts to better align our expenses with our reimbursements. These decreases were partially offset by an increase of $0.6 million in benefits and bonus expense for our Hospital Division and a $0.4$1.3 million increase in stock based compensation expense. ~~Our benefits expense includes~~As part of the strategic options process, the compensation committee of our ~~medical claims costs. We experienced a higher cost per claim~~Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the ~~second~~first quarter of fiscal ~~2010 compared~~2011 to ~~fiscal 2009. Certain employees and directors were granted restricted stock during fiscal 2010 and 2009, thus incrementally increasing our quarterly expense. We recognize employee restricted~~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 ~~periods~~first quarter of fiscal 2011. The shares subject to the waiver of vesting criteria contain transfer restrictions that will remain in ~~which they are expected~~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 ~~vest.~~progress with our strategic options process. We experienced a $0.5 million increase in expense related to hospital employee healthcare claims. This expense is directly attributed to the number of claims reported during the period. These increases were offset by a $0.9 million decline in salaries and wages and related benefits as we continue to monitor costs to better align these costs with net revenues and as the result of a reduction in management positions within hospital division as we sell our hospital assets.

Medical supplies expense.~~Our consolidated medical~~Medical supplies expense ~~increased 4.9%~~decreased 13.1%, or $2.9 million, to ~~$36.8~~$19.2 million for the first quarter of fiscal ~~2010~~2011 from ~~$35.1~~$22.1 million for ~~the second quarter of fiscal 2009. Medical supplies expense on a same facility basis was as follows:~~

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Medical supplies expense $ 35,394 $ 35,120 $ 274 0.8 % 27.7 % 26.9 %

~~The $0.3 million increase in medical supplies expense is a result of a 2.8% increase in adjusted admissions on a same facility basis and as a result of the mix of procedures performed during~~ the first quarter of fiscal 2010. ~~We had an 11.4% reduction~~This decline is due to $2.9 million in ~~open heart surgeries and a 24.6% reduction in AICD implantations, open heart procedures have a higher net revenue per case as compared to other procedures performed~~sales tax refunds at two of our hospitals. ~~With less open heart net revenue,~~Absent the refunds, medical supplies ~~will increase as a percentage~~expense was flat year over year. Medical supplies expense increased $0.7 million at HMMC which began operations in the second month of ~~net revenue. Although our AICD net revenue has declined our cost per AICD has increased due to~~ the ~~type~~first quarter of ~~devices used to treat our patients.~~fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was ~~partially~~ offset by ~~an increase~~a decline in ICD expense as the ~~utilization~~result of ~~higher cost per unit devices.~~a 7.6% decline in ICD procedures for the first quarter of fiscal 2011 compared to the same period of the prior year.

Bad debt expense.~~Our consolidated bad~~Bad debt expense increased ~~35.5%~~29.3%, or $2.2 million, to ~~$11.9~~$9.7 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$8.8~~$7.5 million for the ~~second~~first quarter of fiscal ~~2009.~~2010. As a percentage of net revenue, bad debt expense increased to ~~8.9%~~10.9% for the ~~second~~first quarter of fiscal ~~2010~~2011 as compared to ~~6.7%~~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 March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Bad debt expense $ 11,121 $ 8,798 $ 2,323 26.4 % 8.7 % 6.7 %

~~Our total same facility uncompensated care including charity care and bad debt expense was 10.5% of total same facility~~68.8%, or $3.2 million, increase in self-pay net ~~patient hospital~~ revenue for the ~~second~~first quarter of fiscal ~~2010~~2011 compared to ~~8.2% of total same facility net patient revenue for~~ the ~~second~~first quarter of fiscal 2009. The total number of patients that applied and qualified for charity care increased during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009. We reported $0.4 million more charity care deductions to net revenue during the second quarter of fiscal 2010 when compared to the second quarter of fiscal 2009. Bad debt expense alone (not including charity care) increased $2.3 million for the second quarter of fiscal 2010 compared to the same period of the prior year. This is directly attributable to a $2.4 million increase in our same facility self-pay revenue for the second quarter of fiscal 2010 compared to the same period of the prior year.2010. We reserve for the estimated bad debt on self-pay net revenue at the time of ~~recognition.~~recognition based on our historical collection experience related to self-pay patients. This increase was offset by lower bad debt expense in certain markets due to lower net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.

Other operating expenses.~~Our consolidated other~~Other operating expenses increased ~~8.8%~~7.9%, or $1.8 million, to ~~$29.7~~$24.1 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$27.3~~$22.3 million for the ~~second~~first quarter of fiscal ~~2009. Other operating expense on a same facility basis was as follows:~~

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Other operating expense $ 26,914 $ 27,342 $ (428 ) (1.6 )% 21.1 % 20.9 %

~~Our total same facility other operating expense decreased $0.4 million for the second quarter of fiscal 2010 compared to fiscal 2009.~~2010. The material and notable increases (decreases) in operating expenses were increases in employee benefit expense, legal and professional fees, and property taxes, mostly offset by reductions in professional liability insurance, bonus, and temporary labor and recruiting expenses, as reflected below (in millions):

Professional liability insurance $ (1.1 )
Corporate bonus expense $ (1.0 )
Temporary labor and recruiting expense $ (0.5 )
Property taxes $ 0.4
Legal and professional fees $ 0.7
Corporate employee benefits expense $ 0.9
Other $ 0.2


Professional fees	$	1.2
Purchased services — nonclinical	$	0.7
Corporate division medical benefits	$	0.4
Repairs and maintenance	$	0.3
Temporary labor	$	0.3
Insurance expense	$	0.2
Bonus expense	$	0.2
Physician practice expenses	$	(0.3	)
Recruiting, relocation and travel expense	$	(0.4	)
Salaries and wages	$	(0.6	)

Our professional fees have increased $1.2 million as the direct result of our strategic options process, which included the sale of several of our assets and the exploration of alternatives for the sale of our remaining assets or our equity. We will continue to incur professional fees during fiscal 2011 as our strategic options process continues.

Our purchased services — nonclinical expense includes $1.3 million in third party consulting fees to obtain sales tax refunds on medical supplies at certain of our hospitals. As noted above under medical supplies expense, we filed sales tax refund claims of $2.9 million during the first quarter of fiscal 2011. The increase related to the consulting fees was offset by declines in non-clinical services as we control costs to better align with our net revenues.

Our corporate division medical benefits expense increases as medical claims increase. The claims increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 is the direct cause for the $0.4 million increase.

2322

WeRepairs and maintenance costs have increased as our facilities age and also as a result of the addition of our newest hospital HMMC, which began operations in the second month of the first quarter of fiscal 2010. HMMC contributed $0.2 million of the total increase during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as maintenance costs were incurred ~~specific large dollar claims for certain of~~on the new facility.

Temporary labor has increased at our corporate division to support our hospitals during the ~~second~~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 ~~2009. We have experienced favorable claim experience so far for fiscal 2010. As a result in~~2011 compared to the ~~reduction in specific claims during~~first quarter of fiscal 2010, our salaries and ~~favorable claim experience~~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 ~~current policy year,~~first quarter of fiscal 2011 increased $0.2 million as we anticipate more of our ~~overall professional liability insurance cost has declined.~~

~~Corporate bonuses are accrued~~hospitals will meet the fiscal 2011 bonus targets based on the ~~expected attainment~~first quarter of ~~operating performance and/or individual goals. The reduction in corporate bonuses is a result of reducing~~fiscal 2011 results compared to the ~~accrual for corporate bonuses to management’s current~~ estimate ~~of the attainment of these goals~~ for the ~~2010~~first quarter of fiscal ~~year.~~2010. We evaluate the progress of our bonus programs on a quarterly basis and adjust quarterly as deemed necessary.

~~Temporary labor~~Our relocation, recruiting and ~~recruiting~~travel expense ~~has~~ declined ~~as we continue~~$0.4 million during the first quarter of fiscal 2011 compared to ~~evaluate~~the first quarter of fiscal 2010 due to our strategic ~~options. In addition,~~options process. We hired several key ~~positions were filled prior to~~executives during the ~~second~~first quarter of fiscal 2010, which ~~has reduced our recruiting~~contributed to a higher expense ~~for fiscal 2010~~in the prior year compared to the ~~same period~~first quarter of ~~the prior year.~~fiscal 2011. In addition, we have incurred less travel expense as assets are sold.

~~Legal and professional fees are incurred as we evaluate our strategic options and fees related~~Our physician practice expenses have declined $0.3 million during the first quarter of fiscal 2011 compared to the ~~pending sale of Heart Hospital of Austin.~~

~~Corporate employee benefits expense has increased due to an increase in specific claims expense for our employees for the second~~first quarter of fiscal 2010 as our primary care practice at one of our hospitals has decreased the total number of physicians within the practice. Conversely, there was a $0.4 million decline in revenues related to the primary care practice.

Salaries and wage expense declined $0.6 million for the first quarter of fiscal 2011 compared to the ~~same period~~first quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in severance expense and $0.4 million in retention bonus expense during the ~~prior year.~~first quarter of fiscal 2011. The increase in severance and retention expense was offset by a $2.0 million decline in salaries and wages expense as corporate positions have been eliminated and/or consolidated as we align our costs with our revenues and as we sell assets that we support.

Depreciation expense.Depreciation expense decreased $1.0 million to $4.9 million for the first quarter of fiscal 2011 from $5.9 million for the first quarter of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.

Interest expense.Interest expense increased ~~$0.5~~$0.2 million to $1.1 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$0.6~~$0.9 million for the ~~second~~first quarter of fiscal ~~2009.~~2010. The ~~$0.5 million~~ increase in interest expense is ~~primarily~~ attributable to a slight increase in the ~~fact that no interest expense was capitalized during~~rate charged on outstanding debt and an increase in the ~~second~~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 ~~2010, whereas $0.8 million of interest expense was capitalized during the comparable period of fiscal 2009 due~~2011 is related to the ~~completion~~sale of our ~~expansion projects and opening~~interest in Avera Heart Hospital of ~~HMMC. The increase in interest expense due to the cessation of capitalized interest was~~South Dakota (“AHHSD”) partially offset by a nominal loss on the ~~overall reduction in our outstanding debt resulting in lower interest payments during the second quarter of fiscal 2010.~~

~~Loss on note receivable.~~Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to our determinationsale of the ~~third party’s inability to repay the note~~Company’s interest in Southwest Arizona Heart and ~~the insufficiency of the value of the collateral securing the note.~~Vascular Center, LLC. Such sales occurred on October 1, 2010 and November 1, 2010, respectively.

Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in ~~two~~ unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division. The Company owned two unconsolidated hospitals until the disposition of its interest in AHHSD on October 1, 2010.

Net earnings of unconsolidated affiliates in which we have a noncontrolling interest increased during the second quarter of fiscal 2010 to $3.1 million from $2.7 million for the second quarter of fiscal 2009. Approximately $0.2 million of the increaseEquity in net earnings of unconsolidated affiliates ~~was~~decreased during the first quarter of fiscal 2011 to $0.6 million from ~~unconsolidated affiliates within our MedCath Partners Division and $0.2~~$1.5 million for the same period of fiscal 2010. AHHSD contributed $1.0 million of net earnings during the ~~increase~~first quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net ~~earnings of unconsolidated affiliates was from unconsolidated affiliates within our Hospital Division.~~earnings. The ~~$0.2 million increase for our MedCath Partners Division is related to increased volumes for one of our managed ventures offset by a $0.1 million impairment charge related~~Company expects continued decreases due to the ~~anticipated sale~~disposition of its ~~investment~~interest in ~~Tri-County. The remaining $0.2 million increase associated with our Hospital Division is related to favorable year over year results for Harlingen Medical Center.~~Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010.

Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries ~~decreased~~increased to ~~$2.5~~$11.4 million for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~$4.5~~$0.8 million for the comparable period of fiscal ~~2009.~~2010.

Net income attributable to noncontrolling ~~interests on a same facility basis was as follows:~~

Three Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net income attributable to noncontrolling interest $ 3,294 $ 4,465 $ (1,171 ) (26.2 )% 2.6 % 3.4 %

~~On a same facility basis, net income attributable to noncontrolling~~ interest ~~decreased $1.2~~increased $7.1 million and $2.2 million due to ~~a reduction~~the noncontrolling shareholders’ interest in ~~net income~~the gains recognized in fiscal 2011 upon the disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH in ~~our disproportionate share~~the first quarter of ~~losses from certain~~fiscal 2010 and the Company’s sale of ~~our facilities.~~its interest in AzHH on October 1, 2010.

We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, seeCritical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009.~~2010.

2423

Income tax expense (benefit) ~~expense.~~.Income tax ~~benefit~~expense (benefit) was ~~$7.4~~an expense of $4.5 million for the ~~second~~first quarter of fiscal 2011 compared to a benefit of $(1.3) million for the first quarter of fiscal 2010, ~~compared to an expense of $2.6 million for the second quarter of fiscal 2009,~~ which represents an effective tax rate of ~~approximately 38.1%~~32.4% and ~~38.2%~~(66.1)% for the respective periods. The first quarter fiscal 2011 effective rate is below our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests. The first quarter fiscal 2010 effective rate is above our federal statutory rate of 35.0% due to the recognition of a disproportionate share of the losses at certain of our hospitals, partially offset by the allocation of income allocable to our noncontrolling interests. The Company has recognized a disproportionate share of losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and committed capital of the Company’s partners or members.

~~Income~~(Loss) income from discontinued operations, net of taxes.~~Income~~(Loss) income from discontinued operations, net of taxes ~~reflects the results of DHH, HHA, Cape Cod, and Sun City for the second quarter of fiscal 2010 and fiscal 2009. Discontinued operations decreased~~increased to income of ~~$1.2~~$26.1 million, net of taxes for the ~~second~~first quarter of fiscal ~~2010~~2011 from ~~income~~a loss of ~~$2.1~~$1.1 million, net of taxes, for the comparable period of fiscal 2009. Income from discontinued operations during the second quarter of fiscal 2010 reflected the operations of HHA and the related continued activities associated with previously divested facilities, which primarily related to accounts receivable and medical malpractice reserves. Income from discontinued operations from the same quarter of fiscal 2009 reflected the operating income from HHA and Sun City, offset by losses at DHH.

~~Results of Operations~~

~~Six Months Ended March 31, 2010 Compared to Six Months Ended March 31, 2009~~

~~Statement of Operations Data~~.~~The following table presents our results of operations in dollars and as a percentage of net revenue for the periods indicated:~~

Six Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 258,967 $ 256,822 $ 2,145 0.8 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 91,508 88,029 3,479 4.0 % 35.3 % 34.3 %
Medical supplies expense 71,747 69,357 2,390 3.4 % 27.7 % 27.0 %
Bad debt expense 22,599 18,392 4,207 22.9 % 8.7 % 7.2 %
Other operating expenses 59,355 54,502 4,853 8.9 % 23.0 % 21.2 %
Pre-opening expenses 866 587 279 47.5 % 0.3 % 0.2 %
Depreciation 15,418 12,713 2,705 21.3 % 6.0 % 5.0 %
Amortization 16 16 — — 0.0 % 0.0 %
Impairment of property and equipment 19,948 — 19,948 100.0 % 7.7 % —
Loss on disposal of property, equipment — —
and other assets 19 181 (162 ) (89.5 )% 0.0 % 0.1 %

(Loss) Income from operations (22,509 ) 13,045 (35,554 ) (272.5 )% (8.7 )% 5.0 %
Other income (expenses):
Interest expense (2,207 ) (2,678 ) 471 17.6 % (0.8 )% (1.0 )%
Loss on early extinguishment of debt — (6,702 ) 6,702 100.0 % — (2.6 )%
Interest and other income 93 172 (79 ) (45.9 )% 0.0 % 0.1 %
Loss on note receiveable (1,507 ) — (1,507 ) (100.0 )% (0.6 )% —
Equity in net earnings of unconsolidated affiliates 4,608 4,779 (171 ) (3.6 )% 1.8 % 1.8 %

(Loss) income from continuing operations before
income taxes (21,522 ) 8,616 (30,138 ) (349.8 )% (8.3 )% 3.3 %
Income tax (benefit) expense (9,287 ) 1,115 (10,402 ) (932.9 )% (3.6 )% 0.4 %

(Loss) income from continuing operations (12,235 ) 7,501 (19,736 ) (263.1 )% (4.7 )% 2.9 %
Income from discontinued operations, net of taxes 1,733 7,915 (6,182 ) (78.1 )% 0.6 % 3.1 %

Net (loss) income (10,502 ) 15,416 (25,918 ) (168.1 )% (4.1 )% 6.0 %
Less: Net income attributable to noncontrolling interest (3,364 ) (7,588 ) (4,224 ) (55.7 )% (1.3 )% (3.0 )%

Net (loss) income attributable to MedCath Corporation $ (13,866 ) $ 7,828 $ (21,694 ) (277.1 )% (5.4 )% 3.0 %

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (15,091 ) $ 1,685 $ (16,776 ) (995.6 )% (5.8 )% 0.6 %
Income from discontinued operations, net of taxes 1,225 6,143 (4,918 ) (80.1 )% 0.4 % 2.4 %

Net (loss) income $ (13,866 ) $ 7,828 $ (21,694 ) (277.1 )% (5.4 )% 3.0 %

HMMC, which is located in Kingman, AZ, opened in October 2009. For comparison purposes, the selected operating data below are presented on an actual basis and on a same facility basis. Same facility basis excludes HMMC from operations for the three and six months ended March 31, 2010. ~~The following table presents selected operating data on a consolidated basis and a same facility basis for the periods indicated:~~

Six Months Ended March 31,
2010 Same
2010 2009 % Change Facility % Change

Selected Operating Data (a):

Number of hospitals 7 6 6
Licensed beds (b) 600 451 530
Staffed and available beds (c) 514 404 444
Admissions (d) 12,813 12,230 4.8 % 12,127 (0.8 )%
Adjusted admissions (e) 18,685 16,983 10.0 % 17,405 2.5 %
Patient days (f) 48,252 47,039 2.6 % 45,488 (3.3 )%
Adjusted patient days (g) 70,521 65,452 7.7 % 65,518 0.1 %
Average length of stay (days) (h) 3.77 3.85 (2.1 )% 3.75 (2.6 )%
Occupancy (i) 51.6 % 64.0 % 56.3 %
Inpatients with a catheterization procedure (j) 5,845 6,229 (6.2 )% 5,714 (8.3 )%
Inpatient surgical procedures (k) 3,598 3,576 0.6 % 3,468 (3.0 )%
Hospital net revenue (in thousands except percentages) $ 249,789 $ 245,687 1.7 % $ 237,938 (3.2 )%


~~(a)~~		Selected operating data includes consolidated hospitals in operation as of the end of the period reported in continuing operations but does not include hospitals which are accounted for using the equity method or as discontinued operations in our consolidated financial statements.

~~(b)~~		~~Licensed beds represent the number of beds for which the appropriate state agency licenses a facility regardless of whether the beds are actually available for patient use.~~

~~(c)~~		~~Staffed and available beds represent the number of beds that are readily available for patient use at the end of the period.~~

~~(d)~~		~~Admissions represent the number of patients admitted for inpatient treatment.~~

~~(e)~~		Adjusted admissions are a general measure of combined inpatient and outpatient volume. We compute adjusted admissions by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by admissions.

~~(f)~~		~~Patient days represent the total number of days of care provided to inpatients.~~

~~(g)~~		Adjusted patient days are a general measure of combined inpatient and outpatient volume. We compute adjusted patient days by dividing gross patient revenue by gross inpatient revenue and then multiplying the quotient by patient days.

~~(h)~~		~~Average length of stay (days) represents the average number of days inpatients stay in our hospitals.~~

~~(i)~~		~~We compute occupancy by dividing patient days by the number of days in the period and then dividing the quotient by the number of staffed and available beds.~~

~~(j)~~		~~Inpatient catheterization procedures represent the number of inpatients with a procedure performed in one of the hospitals’ catheterization labs during the period.~~

~~(k)~~		~~Inpatient surgical procedures represent the number of surgical procedures performed on inpatients during the period.~~

~~Net Revenue.~~Our consolidated net revenue increased 0.8% or $2.2 million to $259.0 million for the six months ended March 31, 2010 from $256.8 million for the six months ended March 31, 2009. Hospital Division net revenue increased 1.9%, or $4.6 million, for the first six months of fiscal 2010 compared to the same period of fiscal 2009. Beginning in our first quarter of fiscal 2010, our MedCath Partners Division renegotiated certain management contracts. As a result, certain expenses once incurred by our MedCath Partners Division and reimbursed, are no longer being billed nor incurred by our MedCath Partners Division. There was a $1.5 million decrease in net revenue in our MedCath Partners Division as well as a $1.5 million reduction in expenses due to this billing change. Net revenue on a same facility basis was as follows:

Six Months Ended March 31,
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 247,116 $ 256,822 $ (9,706 ) (3.8 )% 100.0 % 100.0 %

Same facility inpatient net revenue was 72.5% of the Hospital Division’s same facility net patient revenue for the first six months of fiscal 2010 compared to approximately 74.7% for the same period of the prior year. Our total same facility inpatient cases were flat and inpatient net revenue was down 5.4% for the first six months of fiscal 2010 compared to the first six months of fiscal 2009. This decline was due primarily to a 5.2% reduction in our core cardiovascular related cases, resulting in a $15.4 million reduction in total same facility net patient revenue offset by an increase in our inpatient non-cardiovascular revenue. Outpatient net revenue increased 5.0% due to a 45.5% increase in outpatient AICD implants, pacer implants and EP studies/ablations net revenue. These procedures have increased due to the addition of physicians performing these procedures at certain of our hospitals. Emergency department net revenue increased 8.4% due to the mix of the procedures performed and due to the recent expansions at certain of our hospitals.

Net revenue for the first six months of fiscal 2010 included charity care deductions of $4.2 million compared to charity care deductions of $2.1 million for the first six months of fiscal 2009. The $2.1 million increase is the result of more uninsured patients applying and qualifying for charity care.

~~Personnel expense.~~Our consolidated personnel expense increased 4.0% to $91.5 million for the first six months ended March 31, 2010 from $88.0 million for the first six months ended March 31, 2009. Personnel expense on a same facility basis was as follows:

Six Months Ended March 31,
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Personnel expense $ 83,977 $ 88,029 $ (4,052 ) (4.6 )% 34.0 % 34.3 %

The $4.1 million reduction in same facility personnel expense was primarily due to a $4.7 million reduction in salaries and wages, including temporary labor, offset by an increase in medical benefits expense. We continue to experience reductions in salaries and wages as we focus on aligning our expenses with our revenues. The total percentage of personnel expense is approximately the same for the first six months of fiscal 2010 and fiscal 2009. Our benefits expense increased as the result of an increase in the number of medical claims for the first six months of fiscal 2010 compared to the first six months of fiscal 2009.

~~Medical supplies expense.~~Our consolidated medical supplies expense increased 3.4% to $71.7 million for the first six months of fiscal 2010 from $69.4 million for the first six months of fiscal 2009. Medical supplies expense on a same facility basis was as follows:

Six Months Ended March 31,
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Medical supplies expense $ 69,496 $ 69,357 $ 139 0.2 % 28.1 % 27.0 %

~~Our medical supplies expense for the first six months of fiscal 2010 remained relatively flat compared to the first six months of fiscal 2009.~~ During the first six months of fiscal 2010 we experienced lower volumes on procedures that have high net revenue per case, such as open heart procedures. We had a 10.1% reduction in open heart surgeries for the first six months of fiscal 2010 compared to the same period of the prior year. With less open heart net revenue, the percentage of medical supplies will increase as a percentage of net revenue.

~~Bad debt expense.~~Our consolidated bad debt expense increased 22.9% to $22.6 million for the first six months of fiscal 2010 from $18.4 million for the first six months of fiscal 2009. As a percentage of net revenue, bad debt expense increased to 8.7% for the fix six months of fiscal 2010 as compared to 7.2% for the comparable period of fiscal 2009. Bad debt expense on a same facility basis was as follows:

Six Months Ended March 31,
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Bad debt expense $ 20,782 $ 18,392 $ 2,390 13.0 % 8.4 % 7.2 %

Our total same facility uncompensated care including charity care and bad debt expense was 10.4% of total same facility net patient hospital revenue for the first six months of fiscal 2010 compared to 8.3% of total same facility net patient revenue for the first six months of fiscal 2009. The total number of patients which applied and qualified for charity care increased during first quarter of fiscal 2010 compared to the first quarter of fiscal ~~2009. We reported $2.1~~2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, ~~more charity deductions to net revenue during the first six months~~partially offset by an $11.1 million loss on early termination of ~~fiscal 2010 when compared to the first six months of fiscal 2009. Bad~~ debt ~~expense alone (not including charity care) increased $2.4 million for the first six months quarter of fiscal 2010 compared to the same period~~at one of the ~~prior year. This is attributable to a $3.2 million increase in self-pay revenue for the first six months of fiscal 2010 compared to the same period~~facilities. The significant components of the ~~prior year offset by improved collection~~gains recognized are a $35.7 million gain and a $34.3 million gain on ~~accounts receivable during fiscal 2010.~~

~~Other operating expenses.~~Our consolidated other operating expenses increased 8.9% to $59.4 million for the first six months of fiscal 2010 from $54.5 million for the first six months of fiscal 2009. Other operating expense on a same facility basis was as follows:

Six Months Ended March 31,
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Other operating expense $ 53,984 $ 54,502 $ (518 ) (1.0 )% 21.8 % 21.2 %

Our same facility other operating expense decreased $0.5 million for the first six months compared to the same period of the prior year. Our legal and professional fees which were $1.3 million higher for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 due to the fees incurred related to the pending sale of Heart Hospital of Austin and fees incurred related to our strategic initiatives involving the sale of the ~~Company or individual~~ assets of the Company. Our corporate benefits expense was approximately $0.7 million higher due to an increase in medical claims during the first six months of fiscal 2010 compared to the same period of the prior year. We incurred and additional $0.5 million of maintenance expense during the first six months of fiscal 2010 compared to the first six months of fiscal 2009 as our newer facilities begin to age. These increases were offset by a $1.7 million reduction in our medical malpractice insurance expense and a $0.9 million reduction in our corporate bonus expense. Our medical malpractice expense was higher during the first six months of fiscal 2009 due to specific high dollar settlements at certain of our hospitals. Our corporate bonuses are accrued based on management’s estimate of the attainment of operating performance and/or personal goals. The reduction during the first six months of fiscal 2010 reflects management’s adjustment to the accrual.

~~Interest expense.~~Interest expense decreased $0.5 million or 17.6% to $2.2 million for the first six months of fiscal 2010 from $2.7 million for the first six months of fiscal 2009. The $0.5 million decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt and interest rates on our outstanding debt.

~~Loss on note receivable.~~Our corporate and other division entered into a note receivable agreement with a third party during 2008. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded due to our determination of the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note.

~~Equity in net earnings of unconsolidated affiliates.~~The net earnings of unconsolidated affiliates are comprised of our share of earnings in two unconsolidated hospitals, a hospital realty investment and several ventures within our MedCath Partners Division.

Net earnings of unconsolidated affiliates in which we have a noncontrolling interest decreased during the first six months of fiscal 2010 to $4.6 million from $4.8 million for the same period of the prior year. The $0.2 million decrease was due to a medical office venture within corporate and other, and an impairment charge of $0.1 million within our MedCath Partners Division related to the anticipated sale of its investment in Tri-County.

~~Net income attributable to noncontrolling interest.~~Noncontrolling interest share of earnings of consolidated subsidiaries decreased to $3.4 million for the first six months of fiscal 2010 from $7.6 million for the comparable period of fiscal 2009. Net income attributable to noncontrolling interest on a same facility basis was as follows:

Six Months Ended March 31,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net income attributable to noncontrolling interest $ 5,120 $ 7,588 $ (2,468 ) (32.5 )% 2.1 % 3.0 %

On a same facility basis, net income attributable to noncontrolling interest decreased $2.5 million due to a reduction in net income and an increase in our disproportionate share of losses from certain of our facilities.

We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, see~~Critical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.~~

~~Income tax (benefit) expense.~~Income tax benefit was $9.3 million for the first six months of fiscal 2010 compared to an expense of $1.1 million for the first six months of fiscal 2009, which represents an effective tax rate of approximately 38.1% and 39.8% for the respective periods. The higher income tax rate for the six months of fiscal 2009 was the result of the impact of higher nondeductible permanent differences.

~~Income from discontinued operations, net of taxes.~~Income from discontinued operations, net of taxes, reflects the results of DHH, HHA, Cape Cod, and Sun City for the first six months of fiscal 2010 and fiscal 2009. Discontinued operations decreased to income of $1.7 million, net of taxes for the first six months of fiscal 2010 from income of $7.9 million, net of taxes, for the comparable period of fiscal 2009. Income from discontinued operations during the first six months of fiscal 2010 reflected the operations of HHA and TexSan Heart Hospital, respectively. In addition, pretax loss from operating activities of the ~~related continued activities associated with previously divested facilities, which primarily related to accounts receivable and medical malpractice reserves. Income from~~ discontinued operations from the same period of fiscal 2009 reflected the operating income from HHA, Sun City, Cape Cod, and the gain from the divestiture of Cape Cod, which was sold during the first quarter of fiscal 2009, offset by losses at DHH.businesses decreased $1.0 million.

Liquidity and Capital Resources

~~Working Capital and Cash Flow Activities~~. Our consolidated working capital from continuing operations was $43.7 million at March 31, 2010 and $35.1 million at September 30, 2009. Consolidated working capital from continuing operations increased $8.6 million primarily due to the increase in patient accounts receivable and as a result of being in an income tax receivable position of $0.7 million due to our net loss for the first six months of fiscal 2010 versus an income tax payable position of $0.3 million as of September 30, 2009.

~~At March 31, 2010, we continue to carry a reserve of $9.8 million for outlier payments received in 2004, which is recorded in current liabilities of discontinued operations.~~

~~Cash provided by continuing operations from operating activities was $15.1 million for the first six months of fiscal 2010 compared to $31.8 million for the comparable period of fiscal 2009.~~ The ~~decrease of $16.7 million in~~ cash provided by continuing operations from operating activities was ~~due to an overall $8.4~~$0.5 million ~~decrease in cash generated from continuing operations as a result of the decrease in our net income during~~for the first ~~six~~three months of fiscal ~~2010~~2011 compared to $2.0 million for the comparable period of fiscal 2009. Cash from continuing operations was further decreased by an increase in accounts receivable of $4.5 million, primarily related to the opening of HMMC, an increase in payments of $4.4 million related to the timing of payments associated with accounts payable, and a $1.1 million increase in cash payments related to the timing of prepaid obligations, such as yearly insurance premiums. These increases in cash payments were offset by a $1.7 million reduction in cash payments associated with the purchases of and cost of medical supplies.2010.

Our investing activities from continuing operations ~~used~~provided net cash of ~~$14.3~~$32.1 million for the first ~~six~~three months of fiscal ~~2010~~2011 compared to ~~$49.5~~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 $35.2 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 ~~six 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 ~~comparable~~same period in fiscal 2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of ~~fiscal 2009, a direct result of the completion of the expansion of our hospital facilities and the opening of our new acute care hospital~~Hualapai Mountain Medical Center, which opened in ~~Kingman, Arizona.~~October 2009.

Our financing activities from continuing operations used net cash of ~~$18.4~~$12.9 million for the first ~~six~~three months of fiscal ~~2010~~2011 compared to ~~$41.6~~$12.3 million for the comparable period of fiscal ~~2009.~~2010. Cash used ~~in financing activities decreased $23.2~~to repay long-term debt and obligations under capital leases increased $2.8 million for the first ~~six~~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 ~~$7.8~~decrease of $2.4 million ~~payment on our Credit Facility during~~in distributions to noncontrolling shareholders. Subsequent to the end of the first ~~six months~~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 ~~$14.9~~$0.2 million and ~~$50.1~~$7.5 million for the first ~~six~~three months of fiscal years ~~2010~~2011 and ~~2009,~~2010, respectively. Of the ~~$14.9~~$7.5 million of cash paid for property and equipment during the first ~~six~~three months of fiscal 2010, ~~$6.8~~$3.7 million related to maintenance capital expenditures. The $50.1 million cash paid for property and equipment during the first six months of fiscal 2009 primarily related to the development of HMMC and the expansion projects at two of our existing hospitals,Hualapai Mountain Medical Center, which ~~began during fiscal 2007. All expansion projects were substantially complete during fiscal 2009, and our hospital in Kingman, Arizona~~ opened in October 2009.

Obligations and Availability of Financing.At ~~March~~December 31, 2010, we had ~~$86.6~~$67.4 million of outstanding long-term debt and obligations under capital leases, of which ~~$18.1~~$61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of ~~$72.2~~$58.9 million. The remaining outstanding ~~long-term debt and obligations~~obligation under capital leases of ~~$14.4~~$8.5 million was due to various lenders to our hospitals. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is ~~$85.0~~$59.5 million which ~~was~~is reduced by outstanding letters of credit totaling $1.7 million as of ~~March~~December 31, 2010. As previously noted, on January 5, 2011 the Company made a principal prepayment of $20.6 million of the amounts outstanding under the Amended Credit Facility.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. ~~At March~~However, as noted inLiquidity and Capital Resourcesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, the Company was not required to test the fixed charge coverage ratio at December 31, 2010 and ~~September 30, 2009, TexSAn Heart Hospital was in violation of financial covenants which govern its equipment loans outstanding. Accordingly,~~will retest such compliance at the ~~total outstanding balance for these loans of $4.4 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 ~~March~~December 31, 2010, we guaranteed either all or a portion of the obligations of ~~certain of~~ our subsidiary hospitals for ~~equipment and other notes payable.~~equipment. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from either the hospitals or the physician investors. Access to available borrowings under our Amended Credit Facility is dependent on the Company’s ability to maintain compliance with the financial covenants contained in the Amended Credit Facility. Deterioration in the Company’s operating results could result in failure to maintain compliance with these covenants, which would restrict or eliminate access to available funds.

We believe that internally generated cash flows from operations and ~~available borrowings under our Credit 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. Each intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other assets. Each intercompany real estate loan typically matures in 7 to 10 years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available.

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at rates ranging from 4.87% to 8.43%. The weighted average interest rate for the intercompany equipment loans at December 31, 2010 was 7.09%.

We typically receive a fee from the minority partners in the subsidiary hospitals as further consideration for providing these intercompany real estate and equipment loans.

We also use intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to each hospital’s mortgage and equipment debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets. Also as part of our intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess of the individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with the individual hospital that establish the terms of the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back to the individual hospital on demand and are subordinate to our equity investment in the hospital venture.

The estimated net realizable value of intercompany notes outstanding with the Company’s subsidiaries in continuing operations was $153.2 million and $149.8 million as of September 30, 2010 and December 31, 2010, respectively. All intercompany notes are eliminated in consolidation and are not reflected on the Company’s consolidated balance sheet.

Retained Obligations Subsequent to Disposition.Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. As the Company’s hospitals are organized as partnerships, upon disposition of the related operations, assets and certain liabilities, the partnerships are responsible for the resolution of outstanding payables, remaining obligations, including those related to cost reports, medical malpractice and other obligations and wind down of the respective tax filings of the partnership. The partnerships are also responsible for any unknown liabilities that may arise. The Company has reported all known obligations in its consolidated balance sheets as of December 31, 2010 and September 30, 2010. However, as the ultimate resolution of the outstanding payables and obligations may take in excess of one year, our estimates may prove incorrect and result in the Company paying amounts in excess of those recorded at the respective balance sheet date.

Retained Cash Balance.At December 31, 2010 the Company had $158.5 million in cash related to continuing operations and $45.4 million in cash related to discontinued operations. The Company expects to retain approximately $156.4 million of the $158.5 million cash in continuing operations after it distributes cash from certain hospital partnerships to itself and the minority owners of those partnerships. As of December 31, 2010 the Company’s estimate of total potential cash distributions to the Company from discontinued operations after it distributes cash from the respective hospital partnerships is approximately $25.7 million after taking into account distributions to minority owners, the liquidation of all assets and the settlement of all known liabilities, but does not take into account any unknown contingent liabilities related to the discontinued operations. The estimate of total cash distributions to the Company may change as it updates its estimates. There can be no assurance when the distributions to the Company from discontinued operations may take place, but it may be over an extended period of time. Any cash retained will be used to fund working capital and repay outstanding debt, which is due in full in November 2011.

Disclosure About Critical Accounting Policies

Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, ~~2009.~~2010. During the first ~~six~~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 included herein.~~statements. The adoption of ~~these~~this new accounting ~~policies~~policy did not have a material impact on our consolidated financial statements.

Forward-Looking Statements

Some of the statements and matters discussed in this report and in exhibits to this report constitute forward-looking statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light

of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, ~~2009 as may be updated by our subsequent filings with the SEC,~~2010, before making an investment decision with respect to our equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://www.medcath.com.

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 ~~six~~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 ~~$72.2~~$58.9 million at ~~March~~December 31, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately ~~$0.4~~$0.1 million during the ~~six~~three month period ended ~~March~~December 31, ~~2010.~~2011.

Item 4. Controls and Procedures

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of ~~March~~December 31, 2010, that the Company’s disclosure controls and procedures were effective as of ~~March~~December 31, 2010 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner, and includes controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes during the fiscal quarter to the Company’s internal controls over financial reporting that materially affected or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. See Note 7 —Contingencies and Commitmentsto the consolidated financial statements included in this report.

Item 1A. Risk Factors

Information concerning certain risks and uncertainties appears under the heading “Forward-Looking Statements” in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, ~~2009.~~2010. You should carefully consider these risks and uncertainties before making an investment decision with respect to our ~~debt and equity~~ securities. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

During the period covered by this report, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, ~~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 could have a material adverse effect on our consolidated financial statements~~

Long-lived assets, which include finite lived intangible assets, are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. The determination of whether or not long-lived assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the estimated future cash flows expected to result from the use of those assets. Changes in our strategy, assumptions and/or market conditions could significantly impact these judgments and require adjustments to recorded amounts of long-lived assets. If impairment is determined to be present, the resulting non-cash impairment charges could be material to our consolidated financial statements.

~~Health Care Reform~~

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, followed by the Health Care and Education Reconciliation Act of 2010 on March 30, 2010 (collectively referred to as the “Health Reform Laws”). The Health Reform Laws include many provisions that will affect our Company, although given the complexity of the laws, the full impact on the Company and its operations is not known at this time. In addition, implementing regulations have not been issued which will also have a bearing on how these changes impact the Company. Some of the provisions in the Health Reform Laws are effective immediately while others will not become effective for several years.

Significantly, the Health Reform Laws revised the “whole hospital” exception to the Stark Law by adding additional requirements for hospitals to qualify for the exception. Because all of our hospitals have physician ownership and therefore must comply with the “whole hospital” exception, these additional requirements will apply to all of our hospitals. These requirements include: additional reporting and disclosure obligations; prohibitions on the increase in the percentage of physician ownership over that in place on the date of enactment; prohibitions on expanding the number of beds, operating rooms, or procedure rooms over the number in place as of the date of enactment, specifications for physician investment; and patient safety measures. The limitations on expansion and additional investment by physician owners or investors were effective as to our hospitals as of March 23, 2010.

The Health Reforms Laws also established a new Independent Payment Advisory Board (the “IPAB”) to develop and submit proposals to Congress to reduce Medicare spending. The IPAB could have a significant impact on Medicare spending, which in turn would affect Medicare payments to our hospitals and other health care facilities.

Some of the other provisions contained in the Health Reform Laws may have a positive impact on the Company, such as the expansion in the number of individuals with health insurance and the expansion of Medicaid eligibility. The Health Reform Laws also tie payment to quality measures by establishing a value-based purchasing system and adjusting hospital payment rates based on hospital-acquired conditions and hospital readmissions. Beginning in 2013, hospitals that satisfy certain performance standards will receive increased payments for discharges during the following fiscal year. We believe that if we continue to make quality of care improvements, this may have the effect of reducing costs, increasing payments from Medicare for our services, and increasing physician and patient satisfaction.

The Health Reform Laws also include enhanced government enforcement tools to identify and impose remedies for fraud, which may adversely impact entities in the healthcare industry, including our Company.

In addition, certain provisions of the Health Reform Laws authorize voluntary demonstration projects beginning not later than 2013 for bundling payments for acute, inpatient hospital services, physician services, and post acute services for episodes of hospital care. In addition, beginning no later than January 1, 2012, the Health Reform Laws allows providers organized as accountable care organizations that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program.

~~The Company is unable to predict at this time the full impact of the Health Reform Laws on the Company and its operations.~~Commission.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

On July 27, 2001, we completed an initial public offering of our common stock pursuant to our Registration Statement on Form S-1 (File No. 333-60278) that was declared effective by the SEC on July 23, 2001. We expect to use the remaining proceeds of approximately $13.8 million from the offering to fund development activities, working capital requirements and other corporate purposes. Although we have identified these intended uses of the remaining proceeds, we have broad discretion in the allocation of the net proceeds from the offering. Pending this application, we will continue to invest the net proceeds of the offering in cash and cash-equivalents, such as money market funds or short-term interest bearing, investment-grade securities.

The Board of Directors approved a stock repurchase program of up to $59.0 million in August 2007, which was announced November 2007. Stock purchases can be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal and state securities laws and regulations. The repurchase program may be discontinued at any time. Subsequent to the approval of the stock repurchase program, the Company has purchased 1,885,461 shares of common stock at a total cost of $44.4 million, with a remaining $14.6 million available to be repurchased per the approved stock repurchase program. No shares were repurchased during the six month period ended March 31, 2010.

~~See Note 6 to our annual financial statements in our Annual Report on Form 10-K for the year ended September 30, 2009 for a description of restrictions on payments of dividends and stock repurchases.~~

Item 6. Exhibits


Exhibit No.		Description
~~10.1~~
2.1		Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1)

2.2		Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., ~~LLP~~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 dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French

10.2*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker

10.3*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker

10.4*		Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt

10.5*		Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4)

10.6		Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3)

10.7*		Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Indicates a management contract or compensatory plan or agreement.

(1)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010.

(2)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010.

(3)		Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

(4)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010.

(5)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MEDCATH CORPORATION
Dated: ~~May 10, 2010~~February 9, 2011	By:	/s/ O. EDWIN FRENCH
		O. Edwin French
		President and Chief Executive Officer (principal executive officer)


	By:	/s/ JAMES A. PARKER
		James A. Parker
		Executive Vice President and Chief Financial Officer ~~(principal~~ (principal financial officer)


	By:	/s/ LORA RAMSEY
		Lora Ramsey
		Vice President and Controller (principal accounting officer)

3328

INDEX TO EXHIBITS


Exhibit No.		Description
~~10.1~~
2.1		Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1)

2.2		Amendment to the Asset Purchase Agreement dated as of October 29, 2010 by and between St. David’s Healthcare Partnership, L.P., ~~LLP~~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 dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French

10.2*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated April 29, 2010 by and between MedCath Corporation and James A. Parker

10.3*		Amendment to Employment, Confidentiality and Non-Compete Agreement dated and effective December 30, 2010 by and between MedCath Corporation and James A. Parker

10.4*		Employment, Confidentiality and Non-Compete Agreement effective October 29, 2009 by and between MedCath Incorporated and Daniel Perritt

10.5*		Form of Indemnification Agreement entered into by MedCath with each of its directors and officers(4)

10.6		Call Agreement dated as of October 4, 2010 by and among Hualapai Mountain Medical Center Management, Inc. and the undersigned Investor Members of Hualapai Mountain Medical Center, LLC.(3)

10.7*		Release and Separation Agreement dated as of November 11, 2010 by and between David Bussone and MedCath Corporation(5)

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Indicates a management contract or compensatory plan or agreement.

(1)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 4, 2010.

(2)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 9, 2010.

(3)		Incorporated by reference from the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.

(4)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 26, 2010.

(5)		Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010.

3429


	Page
PART I. FINANCIAL INFORMATION		13
Item 1. Unaudited ~~Consolidated~~ Financial Statements		13
Consolidated Balance Sheets as of ~~March~~December 31, 2010 and September 30, ~~2009~~		1
~~Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2010 and 2009~~		2
~~Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31,~~ 2010		3
Consolidated Statements of ~~Cash Flows~~Operations for the ~~Six~~Three Months Ended ~~March~~December 31, 2010 and 2009		4
Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2010		5
Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2010 and 2009		6
Notes to Unaudited Consolidated Financial Statements		57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3126
Item 4. Controls and Procedures		3126
PART II. OTHER INFORMATION		3126
Item 1. Legal Proceedings		3126
Item 1A. Risk Factors		31
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		3226
Item 6. Exhibits		3326
SIGNATURES		33

~~EX-10.1~~
~~EX-31.1~~
~~EX-31.2~~
~~EX-32.1~~
~~EX-32.2~~		28
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	March 31, 2010					September 30, 2009
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Intangible Assets	$	555	$	(242	)	$	730	$	(352	)