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 ~~June 30,~~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)		~~56-2248952~~ ~~(IRS Employer Identification No.)~~

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

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

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

Yesþ Noo

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

Yeso Nooþ

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


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

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

Yeso Noþ

As of ~~August 5, 2010,~~February 4, 2011, there were ~~20,492,366~~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)


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

Current assets:
Cash and cash equivalents	$	27,396		$	31,883		$	158,475		$	33,141
Accounts receivable, net (See Note 4)		61,230			58,913
Accounts receivable, net								44,795			43,811
Income tax receivable		1,192			—			—			6,188
Medical supplies		15,888			15,459			10,644			10,550
Deferred income tax assets		12,272			12,161			7,815			13,247
Prepaid expenses and other current assets		13,711			13,471			12,902			13,453
Current assets of discontinued operations		26,172			44,978			57,345			47,920

Total current assets		157,861			176,865			291,976			168,310
Property and equipment, net (See Note 13)		289,861			341,394
Investments in affiliates		10,301			14,055
Property and equipment, net								176,885			182,222
Other assets		7,460			10,785			11,652			24,716
Deferred income tax assets		603			—
Non-current assets of discontinued operations		46,741			47,349			1,232			119,290

Total assets	$	512,827		$	590,448		$	481,745		$	494,538


Current liabilities:
Accounts payable	$	27,559		$	35,920		$	19,957		$	15,716
Income tax payable		—			297			14,316			—
Accrued compensation and benefits		17,148			16,118			11,705			16,418
Other accrued liabilities		20,647			23,277			21,073			16,663
Current portion of long-term debt and obligations under capital leases		15,808			21,187			61,573			16,672
Current liabilities of discontinued operations		19,062			19,832			17,014			35,044

Total current liabilities		100,224			116,631			145,638			100,513
Long-term debt		56,250			66,563			—			52,500
Obligations under capital leases		7,459			4,596			5,822			6,500
Deferred income tax liabilities		—			13,874
Other long-term obligations		5,262			8,533			3,883			5,053
Long-term liabilities of discontinued operations		35,872			35,721			—			35,968

Total liabilities		205,067			245,918			155,343			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest (See Note 1)		6,095			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; 22,446,727 issued and 20,492,366 outstanding at June 30, 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		457,058			455,259			457,952			457,725
Accumulated deficit		(118,102	)		(91,420	)		(102,752	)		(139,791	)
Accumulated other comprehensive loss		(395	)		(360	)		—			(444	)
Treasury stock, at cost; 1,954,361 shares at June 30, 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		293,980			318,898			310,619			272,909
Noncontrolling interest		7,685			18,184			9,971			9,561

Total equity		301,665			337,082			320,590			282,470

Total liabilities and equity	$	512,827		$	590,448		$	481,745		$	494,538

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

Three Months Ended June 30, Nine Months Ended June 30,
2010 2009 2010 2009

Net revenue $ 131,847 $ 124,588 $ 390,815 $ 381,410
Operating expenses:
Personnel expense 44,546 43,854 136,055 131,884
Medical supplies expense 35,706 36,472 107,453 105,829
Bad debt expense 13,642 10,406 36,241 28,798
Other operating expenses 29,935 26,537 89,292 81,039
Pre-opening expenses — 754 866 1,340
Depreciation 7,636 6,466 23,054 19,179
Amortization 8 8 24 24
Impairment of property and equipment 22,813 — 42,761 —
Loss (gain) on disposal of property, equipment and other assets 20 (54 ) 39 127

Total operating expenses 154,306 124,443 435,785 368,220

(Loss) income from operations (22,459 ) 145 (44,970 ) 13,190
Other income (expenses):
Interest expense (1,131 ) (396 ) (3,337 ) (3,074 )
Loss on early extinguishment of debt — — — (6,702 )
Interest and other income 62 48 156 220
Loss on note receiveable — — (1,507 ) —
Equity in net earnings of unconsolidated affiliates 2,262 2,265 6,870 7,044

Total other income (expense), net 1,193 1,917 2,182 (2,512 )

(Loss) income from continuing operations before income taxes (21,266 ) 2,062 (42,788 ) 10,678
Income tax (benefit) expense (8,642 ) 171 (17,929 ) 1,287

(Loss) income from continuing operations (12,624 ) 1,891 (24,859 ) 9,391
Income from discontinued operations, net of taxes 2,163 878 3,895 8,793

Net (loss) income (10,461 ) 2,769 (20,964 ) 18,184
Less: Net income attributable to noncontrolling interest (2,355 ) (2,273 ) (5,718 ) (9,860 )

Net (loss) income attributable to MedCath Corporation $ (12,816 ) $ 496 $ (26,682 ) $ 8,324

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (14,155 ) $ 23 $ (29,246 ) $ 1,708
Income from discontinued operations, net of taxes 1,339 473 2,564 6,616

Net (loss) income $ (12,816 ) $ 496 $ (26,682 ) $ 8,324

(Loss) earnings per share, basic
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders $ (0.71 ) $ — $ (1.48 ) $ 0.09
Income from discontinued operations attributable to MedCath Corporation common stockholders 0.07 0.03 0.13 0.33

(Loss) earnings per share, basic $ (0.64 ) $ 0.03 $ (1.35 ) $ 0.42

(Loss) earnings per share, diluted
(Loss) income from continuing operations attributable to MedCath Corporation common stockholders $ (0.71 ) $ — $ (1.48 ) $ 0.09
Income from discontinued operations attributable to MedCath Corporation common stockholders 0.07 0.03 0.13 0.33

(Loss) earnings per share, diluted $ (0.64 ) $ 0.03 $ (1.35 ) $ 0.42

Weighted average number of shares, basic 19,897 19,733 19,823 19,665
Dilutive effect of stock options and restricted stock — — — 56

Weighted average number of shares, diluted 19,897 19,733 19,823 19,721

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

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended December 31,
	2010			2009

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

Total operating expenses		90,481			90,493

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

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

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

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

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

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


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

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


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

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


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

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


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

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

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended June 30,						Three Months Ended December 31,
	2010			2009			2010			2009
Net (loss) income	$	(20,964	)	$	18,184
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		(3,895	)		(8,793	)
(Income) loss from discontinued operations, net of taxes								(39,128	)		1,130
Bad debt expense		36,241			28,798			9,709			7,506
Depreciation		23,054			19,179			4,887			5,938
Amortization		24			24
Gain on sale of unconsolidated investees								(15,391	)		—
Loss on disposal of property, equipment and other assets		39			127			93			96
Share-based compensation expense		2,380			2,068			1,932			608
Loss on early extinguishment of debt		—			6,702
Amortization of loan acquisition costs		745			774			313			252
Impairment of property and equipment		42,761			—
Equity in earnings of unconsolidated affiliates, net of distributions received		3,259			1,777			(84	)		6,217
Deferred income taxes		(14,966	)		58			1,085			(103	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(38,557	)		(22,427	)		(10,693	)		(12,106	)
Medical supplies		(429	)		(2,173	)		(94	)		(73	)
Prepaid and other assets		(1,379	)		(2,230	)		2,266			(3,088	)
Accounts payable and accrued liabilities		(3,526	)		3,597			(2,825	)		(2,523	)

Net cash provided by operating activities of continuing operations		24,787			45,665			535			2,039
Net cash provided by operating activities of discontinued operations		6,394			8,163
Net cash (used in) provided by operating activities of discontinued operations								(5,131	)		1,496

Net cash provided by operating activities		31,181			53,828
Net cash (used in) provided by operating activities								(4,596	)		3,535

Investing activities:
Purchases of property and equipment		(16,842	)		(68,038	)		(157	)		(7,532	)
Proceeds from sale of property and equipment		110			836			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		(16,296	)		(67,202	)
Net cash (used in) provided by investing activities of discontinued operations		(1,044	)		2,554
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		(17,340	)		(64,648	)
Net cash provided by (used in) investing activities								226,728			(9,236	)

Financing activities:
Proceeds from long-term debt		—			83,479
Repayments of long-term debt		(16,678	)		(115,515	)		(7,662	)		(5,000	)
Repayments of obligations under capital leases		(1,381	)		(827	)		(614	)		(454	)
Distributions to noncontrolling interest		(9,334	)		(10,312	)		(4,504	)		(6,924	)
Investment by noncontrolling interest		109			—			—			153
Sale of equity interest in subsidiary		140			—			—			140
Proceeds from the exercise of stock options		—			77
Tax withholding of vested restricted stock awards		(293	)		—			(153	)		(253	)

Net cash used in financing activities of continuing operations		(27,437	)		(43,098	)		(12,933	)		(12,338	)
Net cash used in financing activities of discontinued operations		(9,063	)		(5,241	)
Net cash provided by financing activities of discontinued operations								(52,327	)		(9,083	)

Net cash used in financing activities		(36,500	)		(48,339	)		(65,260	)		(21,421	)


Net decrease in cash and cash equivalents		(22,659	)		(59,159	)
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	$	39,042		$	52,909		$	203,902		$	34,579


Cash and cash equivalents of continuing operations		27,396			42,725			158,475			20,249
Cash and cash equivalents of discontinued operations		11,646			10,184			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 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 is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular ~~surgeons. While each~~care. Each of the Company’s hospitals ~~(collectively, the “Hospital Division”) is licensed as~~has a ~~general acute care hospital, the Company focuses on serving the unique needs of patients suffering from cardiovascular disease. As of June 30, 2010, the Company and its physician partners~~24-hour emergency room staffed by emergency department physicians. The Company’s six hospitals that currently comprise continuing operations have ~~an ownership interest in and currently operate ten hospitals in seven states, with a total of 825~~533 licensed beds ~~58 of which~~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 ~~June 30,~~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 ~~interests~~interest in ~~these hospitals~~this hospital as ~~equity method investments.~~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 entities are reported as discontinued operations for all periods presented. See Note 3.

Our Strategic Options Review Process

On March 1, 2010, the ~~Company’s~~Company announced that its Board of Directors ~~decided to begin~~had formed a ~~strategic alternatives review (the “Strategic Alternatives Review”)~~Strategic Options Committee to consider the sale either of ~~either~~ the ~~Company~~Company’s equity or the sale of its individual hospitals and other assets. The ~~Strategic Alternatives Review process is continuing. The~~ Company ~~cannot provide any assurance regarding the result of~~retained Navigant Capital Advisors as its financial advisor to assist in this process.

~~Basis~~ Since announcing the exploration 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 June 30, 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.

	•		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)

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 partnersBasis 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.

Presentation— The Company’s unaudited interim consolidated financial statements as of ~~June 30,~~December 31, 2010 and for the three ~~and nine~~ months ended ~~June 30,~~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 ~~nine~~three months ended ~~June 30,~~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 Patient Protection and Affordable Care Act, as enacted on March 23, 2010 and the Health Care and Education Reconciliation Act of 2010 as enacted on March 30, 2010 (collectively the “Health Reform Laws”). 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 utilizing undiscounted cash flows 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 certain 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 these hospital’s long-lived assets were recoverable as of March 31, 2010. The results indicated the current carrying value of the assets at certain 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 by management using independent appraisals, established market values of comparable assets, and internal estimates of future discounted net cash flows.

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

During the three months ended June 30, 2010, additional information became available relative to the fair market value of certain assets as a result of the Company’s ongoing Strategic Alternatives Review. As a result, it was determined that additional impairment may have occurred related to assets within its Hospital Division and Corporate and other. The Company performed impairment tests using undiscounted cash flows to determine if the carrying value of the long-lived assets were recoverable as of June 30, 2010. The results indicated the current carrying value of the assets 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 an impairment charge based on the amount each group of assets’ carrying value exceeded its fair value. The Company’s fair value estimates were derived by management from independent third party market offers and internal estimates of future discounted 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, the impact of future decisions relative to the Company’s Strategic Alternatives Review, and the impact on 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.

2. Recent Accounting Pronouncements

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

Recently Adopted Accounting ~~Pronouncements:~~Pronouncements

In December 2007, the FASB issued a new accounting standard that 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 onOn 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 Presentation~~~~above 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.

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

~~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.

~~3. Divestitures~~

~~During~~ In August 2010, the ~~Company entered into~~FASB issued ASU 2010-23, “Health Care Entities (Topic 954): Measuring Charity Care for Disclosure,” which requires a ~~definitive agreement~~company in the healthcare industry to ~~sell substantially all~~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 ~~assets, and~~method used to ~~assign certain~~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 ~~the liabilities, of Arizona Heart Hospital, LLC for approximately $32.0 million. The transaction~~this ASU is not expected to ~~close after finalization~~have any impact on our consolidated financial position or results of ~~certain closing conditions.~~operations.

3. 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 expected to close after all regulatory approvals are obtained. The~~United States (“GAAP”), 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 nine months ended June 30, 2010 and 2009. The~~ assets and liabilities of ~~HHA~~these entities have been classified within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance ~~sheets as~~sheets.

During November 2010, the Company entered into an agreement to sell substantially all of ~~June 30,~~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,~~2010, the ~~MedCath Partners Division~~Company entered into an agreement to sell its subsidiary that provided consulting and management services tailored primarily to cardiologists and cardiovascular surgeons. Such subsidiary’s operations had historically been included in the Corporate and other division. Such subsidiary was sold in October 2010 for an immaterial loss.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

During August 2010, the Company entered into a definitive agreement to sell certain of the hospital assets and liabilities, plus certain net working capital of AzHH for $32.0 million and the assumption of capital leases of $0.3 million. The transaction closed on October 1, 2010 with the limited liability company which owned AzHH retaining all accounts receivable and the hospital’s remaining liabilities. As part of its assessment of long-lived assets in June 2010, the Company ~~sold~~recognized an impairment charge of $5.2 million based on its potential sales value of AzHH. Accordingly, the Company recognized a nominal gain on the sale for the three months ended December 31, 2010.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of ~~Sun City Cardiac Center Associates (“Sun City”)~~HHA for ~~$16.9~~$83.8 million plus retention of working capital to St. David’s Healthcare Partnership, L.P, which resulted in a gain of ~~$3.2 million, net of taxes.~~$35.7 million. The Company has classified the results of operations of Sun City within income from discontinued operations, net of taxes for the three and nine months ended June 30, 2010 and 2009. The assets and liabilities of Sun City have been classified within current assets and current liabilities of discontinued operationstransaction closed on ~~the consolidated balance sheets as of June 30, 2010 and September 30, 2009.~~

During December 2008, the MedCath Partners Division of the Company sold its entire interest in Cape Cod Cardiology Services, LLC (“Cape Cod”) for $6.9 million, which resulted in a gain of $4.0 million, net of taxes. The Company has classified the results of operations of Cape Cod within income from discontinued operations, net of taxes for the three and nine months ended June 30, 2009.November 1, 2010.

During May 2008, the Hospital Division of the Company sold the net assets of Dayton Heart Hospital (“DHH”)~~. The Company has classified the results~~ to Good Samaritan Hospital pursuant to a definitive agreement. As of ~~operations related to the remaining assets~~December 31, 2010 and ~~liabilities associated with DHH within income from discontinued operations, net of taxes for the three and nine months ended June~~September 30, 2010, the Company had reserved $10.0 million and ~~2009. The assets and liabilities of~~$9.8 million, respectively, for Medicare outlier payments received by DHH ~~have been classified within current assets and~~during the year ended September 30, 2004, which are included in current liabilities of discontinued operations onin the consolidated balance ~~sheets as~~sheets.

The Company has entered into transition services agreements with the buyers of ~~June 30, 2010 and September 30, 2009.~~certain of its sold assets that extend into fiscal 2011. As a result, the Company entered into a Managed Services Agreement with McKesson Technologies, Inc. (“McKesson”) whereby McKesson would employ the majority of the 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 June 30, Nine Months Ended June 30,
2010 2009 2010 2009

Net revenue $ 23,415 $ 26,797 $ 71,482 $ 84,634
Gain from sale of Cape Cod — — — 6,640
Income before income taxes 3,070 1,182 5,567 13,071
Income tax expense 907 304 1,672 4,278

Net income before noncontrolling interest 2,163 878 3,895 8,793
Less: Net income attributable to noncontrolling interest (824 ) (405 ) (1,331 ) (2,177 )

Net income attributable to MedCath Corporation $ 1,339 $ 473 $ 2,564 $ 6,616

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


	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	)

June 30, September 30,
2010 2009

Cash and cash equivalents $ 11,646 $ 29,818
Accounts receivable, net 10,182 11,821
Other current assets 4,344 3,339

Current assets of discontinued operations $ 26,172 $ 44,978

Property and equipment, net $ 43,612 $ 44,532
Other assets 3,129 2,817

Long-term assets of discontinued operations $ 46,741 $ 47,349

Accounts payable $ 14,369 $ 14,956
Accrued liabilities 4,484 4,820
Current portion of long-term debt and obligations under capital leases 209 56

Current liabilities of discontinued operations $ 19,062 $ 19,832

Long-term debt and obligations under capital leases $ 35,117 $ 35,359
Other long-term obligations 755 362

Long-term liabilities of discontinued operations $ 35,872 $ 35,721

~~4. Accounts Receivable~~

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

June 30, September 30,
2010 2009
Receivables, principally from patients and third-party payors $ 140,281 $ 126,577
Receivables, principally from billings to hospitals for various cardiovascular procedures 1,368 1,494
Amounts due under management contracts 217 228
Other 5,186 5,503

147,052 133,802
Less allowance for doubtful accounts (85,822 ) (74,889 )

Accounts receivable, net $ 61,230 $ 58,913


	December 31,		September 30,
	2010		2010

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

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


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

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


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

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


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

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

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Included in discontinued operations are certain liabilities that the Company has retained upon the disposition of the related entity. Because the Company’s hospitals are organized as partnerships, upon disposition of the related operations, assets and certain liabilities, the partnerships are responsible for the resolution of outstanding payables, remaining obligations, including those related to cost reports, medical malpractice and other obligations and wind down of the respective tax filings of the partnership. The partnerships are also responsible for any unknown liabilities that may arise. The Company has reported all known obligations in its consolidated balance sheets as of December 31, 2010 and September 30, 2010.

4. Accounts Receivable

Accounts receivable, net, consists of the following:


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

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

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

5. ~~Equity~~ 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 ~~interests~~interest 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,~~These investments are included in Other Assets on the consolidated balance sheets.

On October 1, 2010, the Company ~~does not consolidate~~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 ~~results~~indirect owner of ~~operations~~a one-third ownership interest and ~~financial position~~which held management rights in Avera Heart Hospital of ~~these entities, but rather accounts~~South Dakota. Prior to its disposition, the Company had accounted for its ~~noncontrolling~~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 ~~hospitals and other ventures as equity method investments.~~

~~During the second and third quarters~~fourth quarter of fiscal 2010 ~~the MedCath Partners Division sold its entire interest in two ventures, resulting in an immaterial loss.~~

~~The following tables represent summarized combined financial information of~~to record the Company’s ~~unconsolidated affiliates~~investment in such business at its net realizable value expected from the sale proceeds. Prior to its disposition, the Company had accounted for ~~under~~its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity ~~method:~~

Three Months Ended June 30, Nine Months Ended June 30,
2010 2009 2010 2009

Net revenue $ 56,368 $ 56,196 $ 167,199 $ 171,405
Income from operations $ 11,161 $ 12,070 $ 34,102 $ 37,118
Net income $ 8,871 $ 9,750 $ 27,280 $ 30,326

June 30, September 30,
2010 2009

Current assets $ 56,270 $ 68,174
Long-term assets $ 146,207 $ 148,993
Current liabilities $ 23,547 $ 25,770
Long-term liabilities $ 122,869 $ 122,629

~~6. Long-Term Debt~~

~~Long-term debt consists~~method of ~~the following:~~

June 30, September 30,
2010 2009

Credit Facility $ 69,375 $ 80,000
Notes payable to various lenders — 6,054

69,375 86,054
Less current portion (13,125 ) (19,491 )

Long-term debt $ 56,250 $ 66,563

accounting.

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

The following tables represent summarized combined financial information of the Company’s unconsolidated affiliates accounted for under the equity 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 December 31,
	2010		2009

Net revenue	$	35,968	$	53,326
Income from operations	$	6,425	$	8,073
Net income	$	4,440	$	5,777


	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:


	December 31,			September 30,
	2010			2010

Amended Credit Facility		58,901			66,563
Less current portion		(58,901	)		(14,063	)

Long-term debt	$	—		$	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 December 31, 2010 the Term Loan bore interest at 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 ~~$69.4~~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 June 30,~~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, ~~related~~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. ~~At June~~The First Amendment also provides for a reduction in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. As noted under the terms of the First Amendment, the Revolver was further reduced to $54.4 million at December 31, 2010 for mandatory repayment of principal using net cash proceeds from asset dispositions. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at September 30, 2010 or December 31, 2010, and will be retested at the ~~Term Loan bore interest at 3.35%. The maximum availability under the Revolver is $85.0 million which was reduced by outstanding letters of credit totaling $1.7 million at June 30, 2010.~~fiscal quarter ending March 31, 2011 and subsequent fiscal quarters.

~~During~~As further noted in Note 14, the ~~third quarter ended June~~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 ~~repaid~~was in compliance with all covenants governing its outstanding debt.

Interest Rate Swap— During the ~~remaining $4.2~~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 ~~note payable obligations to certain equipment lenders~~(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 ~~behalf~~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 ~~consolidated subsidiary, TexSAn Heart Hospital.~~

~~During December 2008,~~hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company ~~redeemed its outstanding 9 7/8% senior notes (the “Senior Notes”) issued~~to acquire all of the noncontrolling interest in the hospital owned by ~~MedCath Holdings Corp.,~~physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a ~~wholly owned subsidiary of~~disposition transaction. The put allowed the Company’s noncontrolling shareholders in the hospital to put their shares to the Company for ~~$111.2~~the net amount of the physician investors’ unreturned capital contributions. The noncontrolling shareholders’ recorded basis in their partnership interest was zero prior to the amendment of this agreement. Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9 million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its call right and recognized additional redeemable noncontrolling interest of $2.2 million. Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling interest in this partnership together with amounts due from the noncontrolling shareholders into a net obligation of $5.7 million, which is included in other accrued liabilities as of December 31, 2010.

During September 2010, the ~~payment~~Company entered into a call agreement with the minority shareholders of ~~a repurchase premium~~one of ~~$5.0 million and accrued~~its hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest ~~of $4.2 million. The Senior Notes were redeemed through borrowings under the Credit Facility and available cash on hand. In addition~~owned by physician investors for an amount equal to the ~~aforementioned repurchase premium,~~net amount of the ~~Company incurred $2.0~~physician investors unreturned capital contributions ($2.7 million ~~in expense related to the write-off of previously incurred financing costs associated with the Senior Notes. The repurchase premium~~at December 31, 2010 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 nine months ended June~~September 30, ~~2009.~~2010).

1112

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

~~Debt Covenants~~—At 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 $6.1 million was included in the current portion of long-term debt and obligations under capital leases on the Company’s consolidated balance sheet. These loans were paid in-full as of June 30, 2010. As of June 30, 2010, the Company was in compliance with all covenants governing its outstanding debt.

~~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 June 30, 2010 and September 30, 2009. The estimated fair value of long-term debt, including the current portion, at June 30, 2010 was approximately $110.2 million ($40.8 million related to discontinued operations) as compared to a carrying value of $104.0 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 ($35.3 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, ~~the~~ CMS began using recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing ~~claim~~claims review mechanisms. RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. ~~The~~ 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.

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

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 ~~June 30,~~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.

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 ~~negotiated a~~began negotiating settlement ~~agreement~~agreements during the ~~third~~second quarter of fiscal 2009 with the DOJ whereby the Company was 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 negotiated 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 ~~June 30, 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 ~~June 30,~~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 ~~$3.0~~$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 ~~$3.4~~$3.0 million and ~~$3.5~~$3.3 million as of ~~June 30,~~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 ~~June 30,~~December 31, 2010, the maximum potential future payments that the Company could be required to make under these guarantees was ~~approximately$31.6~~$25.9 million ~~($0.6 million related to discontinued operations)~~ through June 2013. At ~~June 30,~~December 31, 2010 the Company had total liabilities of ~~$14.0~~$9.8 million ~~($0.6 million related to discontinued operations)~~ for the fair value of these guarantees, of which ~~$8.7~~$6.6 million is in other accrued liabilities and ~~$0.2 million in current liabilities of discontinued operations, and $4.7~~$3.2 million is in other long term ~~obligations and $0.4 million in long-term liabilities of discontinued operations.~~obligations. Additionally, the Company had assets of ~~$14.2~~$10.2 million ~~($0.6 million related to discontinued operations)~~ representing the future services to be provided by the physicians, of which ~~$8.4~~$6.5 million is in prepaid expenses and other current assets and ~~$0.2 million in current assets of discontinued operations, and $5.2~~$3.7 million is in other ~~assets~~assets.

8. Per Share Data

Basic— The calculation of basic earnings per share includes 150,900 and ~~$0.4 million~~101,500 of restricted stock units that have vested but as of December 31, 2010 and 2009, respectively, have not been converted into common stock.

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

1314

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

~~8. Earnings per Share Data~~

~~Basic~~— The calculation of basic earnings per share includes 150,900 and 95,900 of restricted stock units that have vested but as of June 30, 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 1,205,587 shares of common stock at prices ranging from $4.75 to $33.05, which were outstanding at June 30, 2009, as well as 487,335 shares of restricted stock which were outstanding at June 30, 2009. Of the outstanding stock options and restricted stock 1,692,922 and 1,637,260 have not been included in the calculation of diluted earnings per share for the three and nine months ended June 30, 2009, respectively, because the stock 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 nine months ended June 30, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of taxes.

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 nine~~ months ended ~~June 30,~~December 31, 2010 and 2009 was ~~$0.6~~$1.9 million and ~~$2.4~~$0.6 million, respectively. The associated tax benefits related to the compensation expense recognized for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2010 and 2009 was ~~$0.2~~$0.8 million and ~~$1.0 million, respectively. Stock based compensation expense recorded during the three and nine months ended June 30, 2009 was~~ $0.2 ~~million and $2.1 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended June 30, 2009 was $0.1 million and $0.8~~ million, respectively.

Stock Options

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

For the Three Months Ended
June 30, 2010 June 30, 2009
Weighted- Weighted-
Number of Average Number of Average
Stock Options Exercise Price Stock Options Exercise Price
Outstanding stock options, beginning of period 975,637 $ 22.14 1,302,587 $ 21.60

Exercised — — (7,000 ) 10.95
Cancelled (4,000 ) 16.91 (90,000 ) 21.60

Outstanding stock options, end of period 971,637 $ 22.17 1,205,587 $ 21.66

~~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 June 30, Nine Months Ended June 30,
2010 2009 2010 2009
Net (loss) income $ (10,461 ) $ 2,769 $ (20,964 ) $ 18,184
Changes in fair value of interest rate swap, net of tax benefit (67 ) 126 (35 ) (147 )

Comprehensive (loss) income (10,528 ) 2,895 (20,999 ) 18,037
Less: Net income attributable to noncontrolling interest (2,355 ) (2,273 ) (5,718 ) (9,860 )

Comprehensive (loss) income attributable to MedCath Corporation common stockholders $ (12,883 ) $ 622 $ (26,717 ) $ 8,177

~~13.~~ Property and Equipment

June 30, September 30,
2010 2009

Land $ 30,558 $ 32,629
Buildings 234,194 263,796
Equipment 225,385 217,362
Construction in progress 1,077 17,434

Total, at cost 491,214 531,221
Less accumulated depreciation (201,353 ) (189,827 )

Property and equipment, net $ 289,861 $ 341,394

During the three and nine months ended June 30, 2010 the Company recorded $22.8 million and $42.8 million of impairment charges to the consolidated statement of operations, respectively. 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. During the second quarter ended March 31, 2010, the Company deemed the note receivable to be uncollectable due to the third party’s inability to repay the note and the insufficiency of the value of the collateral securing the note. As a result a loss of $1.5 million was recorded on the consolidated statement of operations during the nine months ended June 30, 2010.


	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

1816

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.~~recurring basis typically relate to long-lived assets held and used and long-lived assets held for sale (including investments in affiliates). Fair values are determined 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.

	•		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 ~~liabilities, which generally are not applicable to non-financial assets~~the existence of variable interest rates underlying such financial instruments that approximate prevailing market rates at December 31, 2010 and ~~liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as independent third party market offers. Fair values determined by~~September 30, 2010. Based on Level 3 inputs, ~~are unobservable data points for~~ the ~~asset or liability and include situations where there is little, if any, market activity for~~fair value of long-term debt, including the ~~asset or liability, such as internal estimates of discounted future cash flows or third party appraisals.~~

~~As of March~~current portion, at December 31, 2010 approximates the ~~fair values of certain longed lived assets within the Hospital Division were $78.9 million, $32.0 million was derived from Level 2 inputs and $46.9 million was derived from~~carrying value. Based on Level 3 inputs, ~~resulting in an impairment~~the fair value of ~~$19.9 million for~~long-term debt, including the ~~three and six month period ended March 31, 2010.~~

~~As of June~~current portion, at September 30, 2010 ~~the fair~~was $108.1 million ($41.5 million related to discontinued operations) as compared to carrying values of ~~certain long lived assets within the Hospital Division and Corporate and other were $54.3~~$101.2 million ~~all~~($34.6 million related to discontinued operations). The fair value of which was derived from Level 2 inputs, resulting in an impairment of $22.8 million for the three month period ended June 30, 2010 and $42.8 million for the nine months ended June 30, 2010. See Notes 1 and 13 for further disclosure regarding these impairments.

~~16. Income Taxes~~

As of June 30, 2010 the Company had a net deferred tax asset of $12.9 million, $12.3 million were current deferred tax assets and $0.6 million were long term deferred tax assets. As of September 30, 2009 the Company had a net deferred tax liability of $1.7 million, $12.2 million were current deferred tax assets and $13.9 million were long term deferred tax liabilities. The change in the Company’s ~~net deferred tax position~~variable rate debt was ~~primarily~~determined to approximate its carrying value due to the ~~recording~~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 ~~$8.8~~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 ~~and $16.4~~using the proceeds from asset dispositions, thereby reducing the outstanding balance under the Amended Credit Facility to $38.3 million ~~in deferred tax~~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 ~~in connection~~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 ~~impairments~~noncontrolling members in the hospital. The approval, consent and proxy allows the Company to sell all or substantially all of ~~property~~the assets of that hospital and ~~equipment during~~ the ~~three and nine month periods ended June 30, 2010, respectively.~~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.

1917

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 that currently comprise our continuing operations have 767533 licensed beds, of which ~~678~~489 are staffed and available, and that are located 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 (“LMCHH”) 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 12seven 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 ~~three 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.”

InPursuant 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’s~~we announced that our Board of Directors ~~began the~~had formed a Strategic ~~Alternatives Review~~Options Committee to consider the sale either of ~~either~~ the Company or the sale of ~~its~~our individual hospitals and other assets. ~~The Strategic Alternatives Review~~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 strategic options process is ~~continuing. The Company cannot provide any assurance regarding~~on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders, such as special cash dividends and/or distributions to stockholders following future sales of individual hospitals or other assets or in the ~~result~~context of ~~this process. As~~ a ~~result, the Company’s Strategic Alternatives Review process may collect information relative to the fair market value~~dissolution, and following repayment of all bank debt and termination of our ~~assets~~credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

Many unknown variables, including those related to seeking any approvals which ~~could result~~may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in ~~additional impairments. However, generally accepted accounting principles do not allow us~~the strategic options process, we are unable to ~~recognize a gain if~~determine the ~~fair value~~approach that best meets the interests of our ~~assets exceeds their carrying value until the disposition of those assets occurs.~~

~~Same Facility Hospitals.~~~~Our policy is~~stockholders. Final amounts available to ~~include, on a same facility basis, only those facilities that were open~~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 ~~nine months ended June 30, 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 June 30,						Nine Months Ended June 30,						Three Months Ended December 31,
Division	2010			2009			2010			2009			2010			2009
Hospital		97.5	%		96.2	%		97.3	%		96.2	%		97.4	%		96.1	%
MedCath Partners		2.4	%		3.7	%		2.6	%		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	%

Results of Operations

Three Months Ended ~~June 30,~~December 31, 2010 Compared to Three Months Ended ~~June 30,~~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 June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 131,847 $ 124,588 $ 7,259 5.8 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 44,546 43,854 692 1.6 % 33.8 % 35.2 %
Medical supplies expense 35,706 36,472 (766 ) (2.1 )% 27.1 % 29.3 %
Bad debt expense 13,642 10,406 3,236 31.1 % 10.3 % 8.3 %
Other operating expenses 29,935 26,537 3,398 12.8 % 22.7 % 21.3 %
Pre-opening expenses — 754 (754 ) (100.0 )% — 0.6 %
Depreciation 7,636 6,466 1,170 18.1 % 5.8 % 5.2 %
Amortization 8 8 — — — —
Impairment of property and equipment 22,813 — 22,813 100.0 % 17.3 % —
Loss (gain) on disposal of property, equipment and other assets 20 (54 ) 74 137.0 % — —

(Loss) income from operations (22,459 ) 145 (22,604 ) N/M (17.0 )% 0.1 %
Other income (expenses):
Interest expense (1,131 ) (396 ) (735 ) 185.6 % (0.8 )% (0.3 )%
Interest and other income 62 48 14 29.2 % — —
Equity in net earnings of unconsolidated affiliates 2,262 2,265 (3 ) (0.1 )% 1.7 % 1.8 %

(Loss) income from continuing operations before income taxes (21,266 ) 2,062 (23,328 ) N/M (16.1 )% 1.6 %
Income tax (benefit) expense (8,642 ) 171 (8,813 ) N/M (6.6 )% 0.1 %

(Loss) income from continuing operations (12,624 ) 1,891 (14,515 ) (767.6 )% (9.5 )% 1.5 %
Income from discontinued operations, net of taxes 2,163 878 1,285 146.4 % 1.6 % 0.7 %

Net (loss) income (10,461 ) 2,769 (13,230 ) (477.8 )% (7.9 )% 2.2 %
Less: Net income attributable to noncontrolling interest (2,355 ) (2,273 ) (82 ) 3.6 % (1.8 )% (1.8 )%

Net (loss) income attributable to MedCath Corporation $ (12,816 ) $ 496 $ (13,312 ) N/M (9.7 )% 0.4 %

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (14,155 ) $ 23 $ (14,178 ) N/M (10.7 )% —
Income from discontinued operations, net of taxes 1,339 473 866 183.1 % 1.0 % 0.4 %

Net (loss) income $ (12,816 ) $ 496 $ (13,312 ) N/M (9.7 )% 0.4 %


				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	)%

(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 ~~5.8%~~1.2% or ~~$7.2~~$1.1 million to ~~$131.8~~$88.9 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$124.6~~$87.8 million for the ~~third~~first quarter of fiscal ~~2009.~~2010. Hospital Division net revenue increased ~~7.3%~~2.6%, or ~~$8.8~~$2.2 million, for the ~~third~~first quarter of fiscal ~~2010~~2011 compared to the same period of fiscal ~~2009. Beginning~~2010. There was a $1.1 million decrease in net revenue in our MedCath Partners Division.

Inpatient net revenue was 69% of the Hospital Division’s net patient revenue for the 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, ~~our MedCath Partners Division renegotiated certain management contracts, joint ventures, and management agreements. As a result, our MedCath Partners Division~~whereas outpatient net revenue ~~declined $1.5 million~~and cases increased 9.3% and 31.5%, respectively during the ~~third~~same period.

The decrease in inpatient net revenue is due to 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 first quarter of fiscal 2010, is a general acute care facility so it contributed to the increase in our non-cardiovascular procedures for the first quarter of fiscal 2011 compared to the same period of ~~fiscal 2009. Net~~the prior 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, ~~on a same facility basis was as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 124,382 $ 124,588 $ (206 ) (0.2 )% 100.0 % 100.0 %
particularly related to emergency department cases.

2321

~~Same~~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 was 69.5% of the Hospital Division’s total same facility net patient revenue for the third quarter of fiscal 2010 compared to 65.9% for the third quarter of fiscal 2009. Inpatient cases for the third quarter of fiscal 2010 increased 6.9% compared to the third quarter of the prior year, however our total inpatient net revenue remained relatively flat as a result of a decline in procedures with higher net revenue per case such as open heart and AICD procedures. Inpatient open heart and AICD net revenues were down 12.9% and 18.2%, respectively, during the third quarter of fiscal 2010 as compared to the comparable period of fiscal 2009. 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. These decreases were offset by a 10.3% increase in inpatient bare metal and drug eluting stent procedures and a 48.1% increase in non-core procedure related net revenue. Inpatient stent revenues have increased as a result of the utilization of an independent third party to assist with the determination of patient clinical setting. The increase in non-cardiac related net revenuedecrease is due to the ~~Hospital Division’s focus on diversifying~~mix of procedures performed. We performed fewer procedures with higher reimbursement during the ~~business from a dependence on cardiac cases and increasing cases in emergency department visits due to several of our hospital expansions.~~

~~Outpatient cases, excluding emergency department cases, and net revenue decreased 2.3% and 3.2%, respectively for the third~~first quarter of fiscal 2010 compared to the third quarter of fiscal 2009. As noted above, the decrease in outpatient cases and net revenue was primarily due to the use of an independent third party to assist with the proper classification of patients as inpatient or outpatient. Emergency department visits and net revenue increased 5.9% and 8.1%, respectively for the third quarter of fiscal 20102011 compared to the same period of ~~fiscal 2009~~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 ~~mix~~expansion at several of ~~the~~our facilities and more procedures ~~performed.~~being performed in an outpatient setting.

~~Same facility net~~Net revenue for the ~~third~~first quarter of fiscal ~~2010~~2011 included charity care deductions of ~~$1.9~~$2.1 million compared to charity care deductions of ~~$0.6~~$1.9 million for the ~~third~~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 ~~1.6%~~2.6%, or $0.9 million, to ~~$44.5~~$32.5 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$43.9~~$31.6 million for the ~~third~~first quarter of fiscal ~~2009. Personnel expense on a same facility basis was as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Personnel expense $ 41,208 $ 43,854 $ (2,646 ) (6.0 )% 33.1 % 35.2 %
2010.

The ~~$2.6 million reduction~~increase in ~~same facility~~ personnel expense was primarily due to ~~an overall reduction in the majority of all personnel related expenses to better align our expenses with the level of care required for our patients. We also incurred~~ a ~~$0.6~~$1.3 million ~~reduction in other salaries and wages expense attributable to our MedCath Partners Division due to a decrease in the staff related to fewer ventures. These decreases were partially offset by an~~ increase ~~of $0.4 million~~ in stock based ~~compensation. Certain employees and directors were granted~~compensation expense. As part of the strategic options process, the compensation committee of our Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the first quarter of fiscal ~~2010 and 2009, thus incrementally increasing our quarterly expense. We recognize employee restricted~~2011 to ensure the deductibility of the compensation expense for federal corporate income tax purposes. The waiver caused all future stock based compensation expense related to the shares that would have vested over time as performance criteria were met to be recognized during the ~~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 supplies expense decreased 13.1%, or $2.9 million, to $19.2 million for the first quarter of fiscal 2011 from $22.1 million for the first quarter of fiscal 2010. This decline is due to $2.9 million in sales tax refunds at two of our hospitals. Absent the refunds, medical supplies expense ~~decreased 2.1% to $35.7~~was flat year over year. Medical supplies expense increased $0.7 million ~~for~~at HMMC which began operations in the ~~third~~second month of the first quarter of fiscal 2010 ~~from $36.5 million~~resulting in higher supply expense for the ~~third~~first quarter of fiscal ~~2009. Medical supplies~~2011. This increase was offset by a decline in ICD expense onas the result of a ~~same facility basis was as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Medical supplies expense $ 34,363 $ 36,472 $ (2,109 ) (5.8 )% 27.6 % 29.3 %

~~The majority of the $2.1 million decrease~~7.6% decline in ~~medical supplies~~ICD procedures for the ~~third~~first quarter of fiscal ~~2010~~2011 compared to the same period of the prior year is attributable to the decline in open heart and AICD cases. Cardiac related cases such as open heart and AICD procedures have higher supply related costs compared to the supply costs of our non-cardiac related cases. In addition, we have negotiated a decline in the unit cost of our drug-eluting stents and our utilization of stents per case has declined.year.

Bad debt expense.~~Our consolidated bad~~Bad debt expense increased ~~31.1%~~29.3%, or $2.2 million, to ~~$13.6~~$9.7 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$10.4~~$7.5 million for the ~~third~~first quarter of fiscal ~~2009.~~2010. As a percentage of net revenue, bad debt expense increased to ~~10.3%~~10.9% for the ~~third~~first quarter of fiscal ~~2010~~2011 as compared to ~~8.3%~~8.5% for the comparable period of fiscal ~~2009. Bad~~2010. This increase is due to a 68.8%, or $3.2 million, increase in self-pay net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. We reserve for the estimated bad debt ~~expense~~ on ~~a same facility basis~~self-pay net revenue at the time of recognition based on our historical collection experience related to self-pay patients. This increase was ~~as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Bad debt expense $ 12,506 $ 10,406 $ 2,100 20.2 % 10.1 % 8.3 %

~~Our total same facility uncompensated care including charity care and~~offset by lower bad debt expense ~~was 11.8% of total same facility~~in certain markets due to lower net ~~patient hospital~~ revenue for the ~~third~~first quarter of fiscal ~~2010~~2011 compared to ~~9.2% of total same facility net patient revenue for~~ the ~~third~~first quarter of fiscal 2009. The total number of patients that applied and qualified for charity care increased during the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. We reported $1.3 million more charity care deductions to net revenue during the third quarter of fiscal 2010 when compared to the third quarter of fiscal 2009. Bad debt expense alone (not including charity care) increased $2.1 million for the third quarter of fiscal 2010 compared to the same period of fiscal 2009. The increase in bad debt expense is directly attributable to an increase in the patient account receivable balance after insurance plan payments. Our self-pay accounts receivable after insurance balance prior to bad debt reductions has increased approximately 15.3% for the third quarter of fiscal 2010 compared to the balance for the third quarter of fiscal 2009.2010.

Other operating expenses.~~Our consolidated other~~Other operating expenses increased ~~12.8%~~7.9%, or $1.8 million, to ~~$29.9~~$24.1 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$26.5~~$22.3 million for the ~~third~~first quarter of fiscal ~~2009. Other operating expense on a same facility basis was as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Other operating expense $ 27,673 $ 26,537 $ 1,136 4.3 % 22.2 % 21.3 %

~~Our total same facility other operating expense increased $1.1 million for the third quarter of fiscal 2010 compared to fiscal 2009.~~2010. The material and notable increases (decreases) in operating expenses were as reflected below (in millions):

Salaries, wages and bonus expense of corporate division $ 0.7
Primary care practice expenses $ 0.6
Property tax $ 0.3
Purchased services $ 0.4
Repairs and maintenance $ 0.3
Professional fees $ (0.4 )
Fees and penalties $ (0.8 )


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	)

~~Corporate salaries~~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 ~~wages have declined $1.0 million due~~the exploration of alternatives for the sale of our remaining assets or our equity. We will continue to ~~natural attrition related to~~incur professional fees during fiscal 2011 as our ~~Strategic Alternatives Review and a reduction in hiring of new employees as we explore these alternatives. In addition, we incurred $0.4~~strategic options process continues.

Our purchased services — nonclinical expense includes $1.3 million in ~~severance~~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 ~~third~~first quarter of fiscal ~~2009 compared~~2011. The increase related to ~~no severance~~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 ~~third~~first quarter of fiscal ~~2010. The decrease in salaries and wages was offset by a $1.7 million increase in bonus expense. Bonuses are accrued based on~~2011 compared to the expected attainment of operating performance and/or individual goals. During the third quarter of fiscal 2009 it was management’s estimate that the attainment of goals required for bonus payout was unlikely and a reduction in bonus expense was recorded at that time. A similar reduction was taken during the secondfirst quarter of fiscal 2010 ~~versus~~is the ~~third quarter of fiscal 2010 based on management’s current estimate of~~direct cause for the ~~attainment of these goals for fiscal 2010.~~$0.4 million increase.

2522

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

Temporary labor has increased at our corporate division to support our hospitals during the strategic options process as full-time employed positions within the corporate division have declined. As discussed below, although our temporary labor has increased for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, our salaries and wages for full-time employees declined by approximately $2.0 million year over year.

Our insurance premiums increased during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2011. This increase is the result of changing the structure of some of our insurance programs to account for our overall strategic environment.

Our bonus expense is recognized as bonuses are earned. The bonus expense for the first quarter of fiscal 2011 increased $0.2 million as we anticipate more of our hospitals will meet the fiscal 2011 bonus targets based on the first quarter of fiscal 2011 results compared to the estimate for the first quarter of fiscal 2010. We evaluate the progress of our bonus programs on a quarterly basis and adjust quarterly as deemed necessary.

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

Our physician practice expenses have declined $0.3 million during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 as our primary care practice at one of our hospitals ~~which~~has decreased the total number of physicians within the practice. Conversely, there was ~~first organized during fiscal 2009. The~~a $0.4 million decline in revenues related to the primary care practice.

Salaries and wage expense declined $0.6 million ~~increase in expense is a result of~~for the ~~addition of physicians to the practice during the third~~first quarter of fiscal ~~2010~~2011 compared to the first quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in severance expense and ~~2009.~~

$0.4 million in retention bonus expense during the first quarter of fiscal 2011. The ~~$0.3 million~~ increase in ~~property taxes~~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 ~~directly~~primarily attributable to the ~~recent expansions at several of our hospitals, which has increased the tax value of our property at these locations.~~

~~Purchased services have increased $0.4 million as a result of an increase~~decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the ~~use of outside clinical~~second and non-clinical providers for services such as anesthesiologist, hospitalist and emergency department personnel. The increases are the result of entering into new contracts with these vendors to ensure 24 hour coverage at our hospitals.

Repair and maintenance expense for our Hospital Division increased $0.3 million for the third quarter of fiscal 2010 when compared to the same period of fiscal 2009 to the fact that our hospitals are aging and in need of higher maintenance.

Professional fees for the third quarter of fiscal 2010 include charges of approximately $1.7 million related to legal, audit, consulting and board of director expenses in connection with the review of our Strategic Alternatives Review. Conversely, we incurred $1.1 million in professional fees during the third quarter of fiscal 2009 associated with an internal assessment of certain controls and procedures, resulting in a $0.6 million year over year increase in professional fees related to special projects. Offsetting this increase is a decline in professional fees related to recurring professional fees as a direct result of the reduction in new corporate initiatives and an overall reduction in outstanding legal matters (see fees and licenses reduction discussion below).

During the third quarter of fiscal 2009 we incurred $0.8 million related to the anticipated settlement of regulatory claims at two of our hospitals related to the identification, return, and self-reporting of $0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years. We did not incur any fees or penalties during the third quarterfourth quarters of fiscal 2010.

Interest expense.Interest expense increased ~~$0.7~~$0.2 million to $1.1 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$0.4~~$0.9 million for the ~~third~~first quarter of fiscal ~~2009.~~2010. The ~~$0.7 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 ~~third~~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 to our expansion projects and construction of HMMC. The increase in interest expense due~~2011 is related to the ~~cessation~~sale of ~~capitalized~~our interest ~~was~~in Avera Heart Hospital of South Dakota (“AHHSD”) partially offset by a nominal loss on the ~~overall reduction~~sale of the Company’s interest in ~~our outstanding debt resulting in lower interest payments during the third quarter of fiscal 2010.~~Southwest Arizona Heart and Vascular Center, LLC. Such sales occurred on October 1, 2010 and November 1, 2010, respectively.

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

~~Net~~Equity in net earnings of unconsolidated affiliates ~~in which we have a noncontrolling interest remained flat from~~decreased during the ~~third~~first quarter of fiscal ~~2009~~2011 to $0.6 million from $1.5 million for the same period of fiscal 2010. AHHSD contributed $1.0 million of net earnings during the first quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases due to the ~~third quarter~~disposition of ~~fiscal~~its interest in 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 increased to ~~$2.4~~$11.4 million for the ~~third~~first quarter of fiscal ~~2010~~2011 from ~~$2.3~~$0.8 million for the ~~third quarter~~comparable period of fiscal ~~2009. Net income attributable to noncontrolling interests on a same facility basis was as follows:~~

Three Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net income attributable to noncontrolling interest $ 2,886 $ 2,273 $ 613 27.0 % 2.3 % 1.8 %
2010.

~~On a same facility basis, net~~Net income attributable to noncontrolling interest increased ~~$0.6~~$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.

~~Results of Operations~~

~~Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 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:~~

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 390,815 $ 381,410 $ 9,405 2.5 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 136,055 131,884 4,171 3.2 % 34.8 % 34.6 %
Medical supplies expense 107,453 105,829 1,624 1.5 % 27.5 % 27.7 %
Bad debt expense 36,241 28,798 7,443 25.8 % 9.3 % 7.6 %
Other operating expenses 89,292 81,039 8,253 10.2 % 22.9 % 21.2 %
Pre-opening expenses 866 1,340 (474 ) (35.4 )% 0.2 % 0.4 %
Depreciation 23,054 19,179 3,875 20.2 % 5.9 % 5.0 %
Amortization 24 24 — — — —
Impairment of property and equipment 42,761 — 42,761 100.0 % 10.9 % —
Loss on disposal of property, equipment and other assets 39 127 (88 ) (69.3 )% — —

(Loss) income from operations (44,970 ) 13,190 (58,160 ) (440.9 )% (11.5 )% 3.5 %
Other income (expenses):
Interest expense (3,337 ) (3,074 ) (263 ) 8.6 % (0.9 )% (0.8 )%
Loss on early extinguishment of debt — (6,702 ) 6,702 100.0 % — (1.8 )%
Interest and other income 156 220 (64 ) (29.1 )% — 0.1 %
Loss on note receivable (1,507 ) — (1,507 ) 100.0 % (0.4 )% —
Equity in net earnings of unconsolidated affiliates 6,870 7,044 (174 ) (2.5 )% 1.8 % 1.8 %

(Loss) income from continuing operations before income taxes (42,788 ) 10,678 (53,466 ) (500.7 )% (11.0 )% 2.8 %
Income tax (benefit) expense (17,929 ) 1,287 (19,216 ) N/M (4.6 )% 0.3 %

(Loss) income from continuing operations (24,859 ) 9,391 (34,250 ) (364.7 )% (6.4 )% 2.5 %
Income from discontinued operations, net of taxes 3,895 8,793 (4,898 ) (55.7 )% 1.0 % 2.3 %

Net (loss) income (20,964 ) 18,184 (39,148 ) (215.3 )% (5.4 )% 4.8 %
Less: Net income attributable to noncontrolling interest (5,718 ) (9,860 ) 4,142 (42.0 )% (1.4 )% (2.6 )%

Net (loss) income attributable to MedCath Corporation $ (26,682 ) $ 8,324 $ (35,006 ) (420.5 )% (6.8 )% 2.2 %

Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes $ (29,246 ) $ 1,708 $ (30,954 ) N/M (7.5 )% 0.4 %
Income from discontinued operations, net of taxes 2,564 6,616 (4,052 ) (61.2 )% 0.7 % 1.8 %

Net (loss) income $ (26,682 ) $ 8,324 $ (35,006 ) (420.5 )% (6.8 )% 2.2 %


~~N/M~~		~~Not meaningful~~

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 nine months ended June 30, 2010. The following table presents selected operating data on a consolidated basis and a same facility basis for the periods indicated:

Nine Months Ended June 30,
2010 Same
2010 2009 % Change Facility % Change

Selected Operating Data (a):

Number of hospitals 7 6 6
Licensed beds ( b ) 600 530 530
Staffed and available beds ( c ) 514 484 444
Admissions ( d ) 19,347 17,883 8.2 % 18,176 1.6 %
Adjusted admissions ( e ) 28,436 25,621 11.0 % 26,252 2.5 %
Patient days ( f ) 72,536 69,841 3.9 % 68,073 (2.5 )%
Adjusted patient days ( g ) 107,012 100,167 6.8 % 98,809 (1.4 )%
Average length of stay (days) ( h ) 3.75 3.91 (4.1 )% 3.75 (4.1 )%
Occupancy ( i ) 51.7 % 52.9 % 56.2 %
Inpatients with a catheterization procedure (j) 8,824 8,993 (1.9 )% 8,624 (4.1 )%
Inpatient surgical procedures (k) 5,463 5,394 1.3 % 5,237 (2.9 )%
Hospital net revenue (in thousands except percentages) $ 377,402 $ 363,790 3.7 % $ 358,086 (1.6 )%

~~(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 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 2.5% or $9.4 million to $390.8 million for the nine months ended June 30, 2010 from $381.4 million for the nine months ended June 30, 2009. Hospital Division net revenue increased 3.7% or $13.4 million, for the first nine 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 and several joint ventures. Consequently, certain management agreements within our MedCath Partners Division were terminated. As a result, our MedCath Partners Division net revenue declined $4.0 million during the nine months of fiscal 2010 compared to the same period of fiscal 2009. Net revenue on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net revenue $ 371,499 $ 381,410 $ (9,911 ) (2.6 )% 100.0 % 100.0 %

Same facility inpatient net revenue was 73.6% of the Hospital Division’s same facility net patient revenue for the nine months of fiscal 2010 compared to approximately 73.0% for the same period of fiscal 2009. Our total same facility inpatient cases increased 1.6% and inpatient net revenue was down 3.6% for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. This decline in net revenue was due primarily to a 1.8% reduction in our core cardiovascular related cases, resulting in a $14.7 million reduction in total same facility core cardiovascular net patient revenue offset by a 26.5% increase in our inpatient non-core procedure related net revenue. Total outpatient net revenue, excluding emergency department net revenue, increased 6.1% due to a 22.2% 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 the recent expansions at certain of our hospitals.

Net revenue for the nine months of fiscal 2010 included charity care deductions of $6.1 million compared to charity care deductions of $2.7 million for the comparable period of fiscal 2009. The $3.4 million increase is the result of more uninsured patients applying and qualifying for charity care.

~~Personnel expense.~~Our consolidated personnel expense increased 3.2% to $136.1 million for the nine months ended June 30, 2010 from $131.9 million for the comparable period of fiscal 2009. Personnel expense on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Personnel expense $ 125,590 $ 131,884 $ (6,294 ) (4.8 )% (33.8 )% 34.6 %

The $6.3 million reduction in same facility personnel expense was primarily due to a $7.2 million reduction in salaries and wages, including temporary labor and bonuses, offset by a $0.9 million increase in employee benefits expense. We continue to experience reduction in salaries and wages as we focus on aligning our expenses with the level of care required for our patients. The total percentage of personnel expense is approximately the same for the nine 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 nine months of fiscal 2010 compared to the comparable period of fiscal 2009.

~~Medical supplies expense.~~Our consolidated medical supplies expense increased 1.5% to $107.5 million for the nine months of fiscal 2010 from $105.8 million for the comparable period of fiscal 2009. Medical supplies expense on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Medical supplies expense $ 103,866 $ 105,829 $ (1,963 ) (1.9 )% (28.0 )% 27.7 %

The $2.0 million decrease to medical supplies expense for the nine months of fiscal 2010 was due to lower volumes on procedures that have high net revenue per case, such as open heart procedures. We had an 11.6% reduction in open heart surgeries for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. With less open heart net revenue, the percentage of medical supplies increases as a percentage of net revenue. In addition, we have negotiated a decline in the unit cost of our drug-eluting stents and our utilization of stents per case has declined.

~~Bad debt expense.~~Our consolidated bad debt expense increased 25.8% to $36.2 million for the nine months of fiscal 2010 from $28.8 million for the comparable period of fiscal 2009. As a percentage of net revenue, bad debt expense increased to 9.3% for the nine months of fiscal 2010 as compared to 7.6% for the comparable period of fiscal 2009. Bad debt expense on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Bad debt expense $ 33,288 $ 28,798 $ 4,490 15.6 % 9.0 % 7.6 %

Our total same facility Hospital Division uncompensated care including charity care and bad debt expense was 10.9% of total same facility net patient hospital revenue for the nine months of fiscal 2010 compared to 8.6% of total same facility net patient revenue for the comparable period 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 $3.4 million more charity deductions to net revenue during the nine months of fiscal 2010 when compared to the comparable period of fiscal 2009. Bad debt expense alone (not including charity care) increased $4.5 million for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. This is attributable to an increase in the self-pay portion of accounts balance after insurance plans and a corresponding increase in the percent of these accounts we believe are uncollectible for the nine months of fiscal 2010 compared to the same period of fiscal 2009.

~~Other operating expenses.~~Our consolidated other operating expenses increased 10.2% to $89.3 million for the nine months of fiscal 2010 from $81.0 million for the comparable period of fiscal 2009. Other operating expense on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Other operating expense $ 82,112 $ 81,039 $ 1,073 1.3 % 22.1 % 21.2 %

Our same facility other operating expense increased $1.1 million for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009. The material and notable increases in operating expenses were as reflected below (in millions):

Employee benefits $ 1.4
Purchased contract services $ 1.2
Professional fees $ 0.8
Repairs and maintenance $ 0.7
Travel $ (0.5 )
Fees and penalties $ (0.8 )
Corporate salaries, wages, bonus, recruitment and temporary labor $ (0.9 )
Advertising expense $ (1.2 )
Professional liability expense $ (1.6 )

~~Our corporate benefits expense was approximately $1.4 million higher due to an increase in employee medical claims during the nine months of fiscal 2010 compared to the same period of fiscal 2009.~~

Purchased contract services have increased $1.2 million as a result of an increase in the use of outside clinical and non-clinical providers for services such as anesthesiologist, hospitalist and emergency department personnel. The increases are the result of entering into new contracts with these vendors to ensure 24 hour coverage at our hospitals.

Our professional fees were $0.8 million higher for the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 due to fees incurred related to the pending sale of HHA and fees related to our Strategic Alternatives Review.

~~We incurred an additional $0.7 million of repairs and maintenance expense during the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 as our newer facilities begin to age.~~

Travel expense has declined during the nine months of fiscal 2010 compared to the comparable period of fiscal 2009 due to the reduction in the number of managed ventures in our MedCath Partners Division, which required travel to these facilities during fiscal 2009, and a reduction in corporate travel as we have ceased any travel related to new initiatives.

During the nine months of fiscal 2009 we incurred $0.8 million related to penalty expense for the anticipated settlement of regulatory claims at two of our hospitals related to the identification, return and self-reporting of $0.7 million in reimbursement for certain procedures performed at those hospitals in prior fiscal years. We did not incur any fees or penalties during the nine months of fiscal 2010.

Our corporate salary related expenses including bonuses, recruitment and temporary labor has declined $0.9 million for the nine months of fiscal 2010 compared to the comparable period for fiscal 2009. The decline is primarily due to the attrition we have experienced as a result of Strategic Alternatives Review as well as a reduction in temporary labor and recruiting expense as new initiatives have declined.

Advertising expense was $1.2 million lower during the nine months of fiscal 2010 compared to the same period of fiscal 2009. We ran several advertising campaigns during the nine months of fiscal 2009 to promote our expanded facilities and to increase volumes in our emergency departments.

~~Our medical malpractice expense was $1.6 million lower for the nine months of fiscal 2010 compared to the same period of fiscal 2009 due to specific high dollar claims incurred in fiscal 2009.~~

~~Interest expense.~~Interest expense increased $0.2 million or 8.6% to $3.3 million for the nine months of fiscal 2010 from $3.1 million for the comparable period of fiscal 2009. The $0.2 million increase in interest expense is primarily attributable to the fact that no interest was capitalized during the nine months of fiscal 2010, whereas $2.3 million of interest was capitalized during the comparable period of fiscal 2009. This increase was offset by our 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 during the three month period ended March 31, 2010, 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 nine months of fiscal 2010 to $6.9 million from $7.0 million for the same period of the prior year. The $0.1 million decrease was primarily due to hospitals in our Hospital Division in which we hold a noncontrolling interest.

~~Net~~(Loss) income ~~attributable to noncontrolling interest.~~Noncontrolling interest share of earnings of consolidated subsidiaries decreased to $5.7 million for the nine months of fiscal 2010 from $9.9 million for the comparable period of fiscal 2009. Net income attributable to noncontrolling interest on a same facility basis was as follows:

Nine Months Ended June 30,
(in thousands except percentages)
Increase/(Decrease) % of Net Revenue
2010 2009 $ % 2010 2009
Net income attributable to noncontrolling interest $ 8,004 $ 9,860 $ (1,856 ) (18.8 )% 2.2 % 2.6 %

On a same facility basis, net income attributable to noncontrolling interest decreased $1.9 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 $17.9 million for the nine months of fiscal 2010 compared to income tax expense of $1.3 million for the comparable period of fiscal 2009, which represents an effective tax rate of approximately 38.0% and 43.0% for the respective periods. The higher income tax rate for the nine months of fiscal 2009 was the result of nondeductible permanent differences related to Medicare settlements as discussed in Note 7 of this report.

~~Income~~ from discontinued operations, net of ~~taxes.~~~~Discontinued operations decreased~~taxes increased to income of ~~$2.6~~$26.1 million, net of taxes for the ~~nine months~~first quarter of fiscal ~~2010~~2011 from ~~income~~a loss of ~~$6.6~~$1.1 million, net of taxes, for the comparable period of fiscal 2009. Income from discontinued operations during the nine months of fiscal 2010 reflected the operations of HHA and the related continued activities associated with DHH, 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 during2010. During the first quarter of fiscal ~~2009,~~2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, partially offset by ~~losses~~an $11.1 million loss on early termination of debt at ~~DHH.~~one of the facilities. The significant components of the gains recognized are a $35.7 million gain and a $34.3 million gain on the sale of the assets of HHA and TexSan Heart Hospital, respectively. In addition, pretax loss from operating activities of the discontinued businesses decreased $1.0 million.

Liquidity and Capital Resources

~~Working Capital and Cash Flow Activities~~. Our consolidated working capital from continuing operations was $50.5 million at June 30, 2010 and $35.1 million at September 30, 2009. Consolidated working capital from continuing operations increased $15.4 million due to an $8.4 million reduction in accounts payable due to a decrease in overall operating expenses, a $2.6 million decrease in other accrued liabilities primarily due to the final payments of our development costs associated with HMMC and LMCHH, and a decrease in the current portion of long-term debt of $6.1 million due to the payment of notes payable related to our consolidated subsidiary, TexSAn Heart Hospital.

~~At June 30, 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 $24.8 million for the nine months of fiscal 2010 compared to $45.7 million for the comparable period of fiscal 2009.~~ The ~~decrease of $20.9 million in~~ cash provided by continuing operations from operating activities was ~~due to an overall increase in bad debt reserves and final payments of $2.3~~$0.5 million ~~and $0.6 million related to our development costs associated with HMMC and LMCHH, respectively, during~~for the ~~nine~~first three months of fiscal ~~2010~~2011 compared to $2.0 million for the comparable period of fiscal ~~2009.~~2010.

Our investing activities from continuing operations ~~used~~provided net cash of ~~$16.3~~$32.1 million for the ~~nine~~first three months of fiscal ~~2010~~2011 compared to ~~$67.2~~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 $50.9 million~~the disposition of the Company’s interest in Avera Heart Hospital of South Dakota and Southwest Arizona Heart and Vascular LLC during the ~~nine months~~first 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 HMMC.~~Hualapai Mountain Medical Center, which opened in October 2009.

Our financing activities from continuing operations used net cash of ~~$27.4~~$12.9 million for the ~~nine~~first three months of fiscal ~~2010~~2011 compared to ~~$43.1~~$12.3 million for the comparable period of fiscal ~~2009.~~2010. Cash used ~~in financing activities decreased $15.7~~to repay long-term debt and obligations under capital leases increased $2.8 million for the ~~nine~~first three months of fiscal ~~2010~~2011 as compared to the comparable period of fiscal ~~2009. The decrease~~2010. This increase was ~~due to the repayment of our 9 7/8% Senior Notes during December 2008~~partially offset by a ~~$10.6~~decrease of $2.4 million ~~payment on our Credit Facility during~~in distributions to noncontrolling shareholders. Subsequent to the ~~nine months~~end of the first quarter of fiscal ~~2010.~~2011, the Company made an additional $20.6 million prepayment of its outstanding balance under the Amended Credit Facility.

Capital Expenditures.Cash paid for property and equipment was ~~$16.8~~$0.2 million and ~~$68.0~~$7.5 million for the ~~nine~~first three months of fiscal years ~~2010~~2011 and ~~2009,~~2010, respectively. Of the ~~$16.8~~$7.5 million of cash paid for property and equipment during the ~~nine~~first three months of fiscal 2010, ~~$8.8~~$3.7 million related to maintenance capital expenditures. The $68.0 million cash paid for property and equipment during the nine months of fiscal 2009 primarily related to the development of HMMC and the expansion projects at two of our existing hospitals. All expansion projects were substantially complete during fiscal 2009, and HMMCHualapai Mountain Medical Center, which opened in October 2009.

Obligations and Availability of Financing.At ~~June 30,~~December 31, 2010, we had ~~$79.5~~$67.4 million of outstanding long-term debt and obligations under capital leases, of which ~~$15.8~~$61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of ~~$69.4 million as of June 30, 2010.~~$58.9 million. The remaining outstanding ~~long-term debt and obligations~~obligation under capital leases of ~~$10.1~~$8.5 million was due to various lenders to our ~~Hospital Division and MedCath Partners Division.~~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 ~~June 30,~~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. AtHowever, as noted inLiquidity and Capital Resourcesin our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2009, TexSAn Heart Hospital~~2010, the Company was ~~in violation of financial covenants which govern its equipment loans outstanding. Accordingly,~~not required to test the ~~total outstanding balance for these loans of $6.1 million has been included in~~fixed charge coverage ratio at December 31, 2010 and will retest such compliance at the ~~current portion of long-term debt~~fiscal quarter ended March 31, 2011 and obligations under capital leases in our consolidated balance sheet. These loans were fully repaid as of June 30, 2010. The covenant violations did not result in any other non-compliance related to the covenants governing our other outstanding debt arrangements. As of June 30, 2010 we were in compliance with all of our covenants.subsequent fiscal quarters.

At ~~June 30,~~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 ~~nine~~first three months of fiscal ~~2010~~2011 we adopted a new accounting ~~policies~~policy as discussed in Note 2 —Recent Accounting Pronouncementsto our consolidated financial ~~statements included herein.~~statements. The adoption of ~~these~~this new accounting ~~policies~~policy did not have a material impact on our consolidated financial statements.

of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, ~~2009 as may be updated by~~2010, before making an investment decision with respect to our ~~subsequent filings with the SEC.~~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 ~~nine~~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 ~~$69.4~~$58.9 million at ~~June 30,~~December 31, 2010. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately ~~$0.5~~$0.1 million during the ~~nine~~three month period ended ~~June 30, 2010.~~December 31, 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 ~~June 30,~~December 31, 2010, that the Company’s disclosure controls and procedures were effective as of ~~June 30,~~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 control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control 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.~~uncertainties before making an investment decision with respect to our 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 factors:~~

~~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 Reform Laws may have a material adverse impact on our financial condition and results of operations~~

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 nine month period ended June 30, 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.~~


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.

INDEX TO EXHIBITS


Exhibit No.		Description

2.1		Membership Interest Purchase Agreement effective as of November 1, 2010 by and among Southwest Arizona Heart and Vascular Center, LLC and MedCath Partners, LLC(1)

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

2.3		Asset Purchase Agreement dated as of November 5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2)

3.1		Amended and Restated Bylaws of MedCath Corporation(3)

10.1*		Amendment to Employment Agreement 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.

3729


	Page
PART I. FINANCIAL INFORMATION		13
Item 1. Unaudited ~~Consolidated~~ Financial Statements		13
Consolidated Balance Sheets as of ~~June 30,~~December 31, 2010 and September ~~30, 2009~~		1
~~Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2010 and 2009~~		2
~~Consolidated Statement of Stockholders’ Equity for the Nine Months Ended June~~ 30, 2010		3
Consolidated Statements of ~~Cash Flows~~Operations for the ~~Nine~~Three Months Ended ~~June 30,~~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		2018
Item 3. Quantitative and Qualitative Disclosures About Market Risk		3326
Item 4. Controls and Procedures		3326
PART II. OTHER INFORMATION		3426
Item 1. Legal Proceedings		3426
Item 1A. Risk Factors		34
~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~		3526
Item 6. Exhibits		3626
SIGNATURES		3628
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	For the Three Months Ended
	June 30, 2010					June 30, 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		1,025,700		$	8.49		559,116		$	9.74

Granted		—			—		96,725			9.42
Vested		(37,800	)		7.56		—			—
Cancelled		(52,870	)		8.04		(72,606	)		9.40


Outstanding restricted stock awards and units, end of period		935,030		$	8.63		583,235		$	9.73


	For the Nine Months Ended										For the Three Months Ended
	June 30, 2010					June 30, 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		616,778			9.01		—			—		369,164			6.99
Vested		(141,695	)		8.65		(52,106	)		20.50		(423,980	)		9.42		(90,195	)		9.30
Cancelled		(68,601	)		8.28		(105,419	)		11.42		—			—		(10,026	)		9.03


Outstanding restricted stock awards and units, end of period		935,030		$	8.63		583,235		$	9.73		460,305		$	7.99		923,270		$	8.54


	Three Months Ended June 30,						Nine Months Ended June 30,
	2010			2009			2010			2009

Net revenue:
Hospital Division	$	128,622		$	119,838		$	380,374		$	366,969
MedCath Partners Division		3,117			4,643			10,109			14,133
Corporate and other		108			107			332			308

Consolidated totals	$	131,847		$	124,588		$	390,815		$	381,410


(Loss) income from operations:
Hospital Division	$	(17,775	)	$	2,030		$	(33,854	)	$	20,606
MedCath Partners Division		(452	)		(62	)		(1,141	)		(548	)
Corporate and other		(4,232	)		(1,823	)		(9,975	)		(6,868	)

Consolidated totals	$	(22,459	)	$	145		$	(44,970	)	$	13,190


	Three Months Ended June 30,
										2010 Same
	2010			2009			% Change			Facility			% Change

Selected Operating Data (a):
Number of hospitals		7			6						6
Licensed beds (b)		600			530						530
Staffed and available beds (c)		514			484						444
Admissions (d)		6,526			5,653			15.4	%		6,042			6.9	%
Adjusted admissions (e)		9,741			8,594			13.3	%		8,837			2.8	%
Patient days (f)		24,276			22,795			6.5	%		22,582			(0.9	)%
Adjusted patient days (g)		36,474			34,803			4.8	%		33,284			(4.4	)%
Average length of stay (days) (h)		3.72			4.03			(7.7	)%		3.74			(7.2	)%
Occupancy (i)		51.9	%		51.8	%					55.9	%
Inpatient catheterization procedures (j)		2,971			2,735			8.6	%		2,903			6.1	%
Inpatient surgical procedures (k)		1,865			1,809			3.1	%		1,769			(2.2	)%
Hospital net revenue (in thousands except percentages)	$	127,613		$	118,104			8.1	%	$	120,148			1.7	%


																										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		374			—		1,979			—			—			—		—			—			1,979			—
Tax withholdings for vested restricted stock awards		(32	)		—		(293	)		—			—			—		—			—			(293	)		—
Distributions to noncontrolling interest		—			—		—			—			—			—		—			(14,005	)		(14,005	)		(3,560	)
Acquisitions and other transactions impacting noncontrolling interest		—			—		—			—			—			—		—			11			11			(43	)
Sale of equity interest		—			—		113			—			—			—		—			27			140			—
Comprehensive loss:
Net loss		—			—		—			(26,682	)		—			—		—			3,468			(23,214	)		2,250
Change in fair value of interest rate swap, net of income tax benefit (*)		—			—		—			—			(35	)		—		—			—			(35	)		—

Total comprehensive loss																								(23,249	)		2,250

Balance, June 30, 2010		22,447		$	216	$	457,058		$	(118,102	)	$	(395	)		1,954	$	(44,797	)	$	7,685		$	301,665		$	6,095


~~(*)~~		~~Tax benefits were $23 for the nine months ended June 30, 2010.~~


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


	June 30, 2010					September 30, 2009
	Gross Carrying		Accumulated			Gross Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Intangible Assets	$	555	$	(256	)	$	555	$	(213	)


	Three Months Ended June 30,
	(in thousands except percentages)
							Increase/(Decrease)						% of Net Revenue
	2010			2009			$			%			2010			2009
Net revenue	$	131,847		$	124,588		$	7,259			5.8	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		44,546			43,854			692			1.6	%		33.8	%		35.2	%
Medical supplies expense		35,706			36,472			(766	)		(2.1	)%		27.1	%		29.3	%
Bad debt expense		13,642			10,406			3,236			31.1	%		10.3	%		8.3	%
Other operating expenses		29,935			26,537			3,398			12.8	%		22.7	%		21.3	%
Pre-opening expenses		—			754			(754	)		(100.0	)%		—			0.6	%
Depreciation		7,636			6,466			1,170			18.1	%		5.8	%		5.2	%
Amortization		8			8			—			—			—			—
Impairment of property and equipment		22,813			—			22,813			100.0	%		17.3	%		—
Loss (gain) on disposal of property, equipment and other assets		20			(54	)		74			137.0	%		—			—

(Loss) income from operations		(22,459	)		145			(22,604	)		N/M			(17.0	)%		0.1	%
Other income (expenses):
Interest expense		(1,131	)		(396	)		(735	)		185.6	%		(0.8	)%		(0.3	)%
Interest and other income		62			48			14			29.2	%		—			—
Equity in net earnings of unconsolidated affiliates		2,262			2,265			(3	)		(0.1	)%		1.7	%		1.8	%

(Loss) income from continuing operations before income taxes		(21,266	)		2,062			(23,328	)		N/M			(16.1	)%		1.6	%
Income tax (benefit) expense		(8,642	)		171			(8,813	)		N/M			(6.6	)%		0.1	%

(Loss) income from continuing operations		(12,624	)		1,891			(14,515	)		(767.6	)%		(9.5	)%		1.5	%
Income from discontinued operations, net of taxes		2,163			878			1,285			146.4	%		1.6	%		0.7	%

Net (loss) income		(10,461	)		2,769			(13,230	)		(477.8	)%		(7.9	)%		2.2	%
Less: Net income attributable to noncontrolling interest		(2,355	)		(2,273	)		(82	)		3.6	%		(1.8	)%		(1.8	)%

Net (loss) income attributable to MedCath Corporation	$	(12,816	)	$	496		$	(13,312	)		N/M			(9.7	)%		0.4	%


Amounts attributable to MedCath Corporation common stockholders:
(Loss) income from continuing operations, net of taxes	$	(14,155	)	$	23		$	(14,178	)		N/M			(10.7	)%		—
Income from discontinued operations, net of taxes		1,339			473			866			183.1	%		1.0	%		0.4	%

Net (loss) income	$	(12,816	)	$	496		$	(13,312	)		N/M			(9.7	)%		0.4	%


Salaries, wages and bonus expense of corporate division	$	0.7
Primary care practice expenses	$	0.6
Property tax	$	0.3
Purchased services	$	0.4
Repairs and maintenance	$	0.3
Professional fees	$	(0.4	)
Fees and penalties	$	(0.8	)


Employee benefits	$	1.4
Purchased contract services	$	1.2
Professional fees	$	0.8
Repairs and maintenance	$	0.7
Travel	$	(0.5	)
Fees and penalties	$	(0.8	)
Corporate salaries, wages, bonus, recruitment and temporary labor	$	(0.9	)
Advertising expense	$	(1.2	)
Professional liability expense	$	(1.6	)


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


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


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