UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~December 31, 2010~~June 30, 2011


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

Commission File Number 000-33009

MEDCATH CORPORATION

(Exact name of registrant as specified in its charter)


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

10720 Sikes Place, Suite ~~300~~200
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 Noþo

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)

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

Yeso Noþ

As of ~~February 4,~~August 5, 2011, there were ~~20,308,070~~20,436,291 shares of $0.01 par value common stock outstanding.

PART I. FINANCIAL INFORMATION


Item 1.		~~Item 1.~~ Unaudited Consolidated Financial Statements

MEDCATH CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)


	December 31,			September 30,
	2010			2010			June 30,			September 30,
							2011			2010
Current assets:
Cash and cash equivalents	$	158,475		$	33,141		$	113,669		$	32,892
Accounts receivable, net		44,795			43,811			44,423			42,141
Income tax receivable		—			6,188			—			6,188
Medical supplies		10,644			10,550			10,338			10,540
Deferred income tax assets		7,815			13,247			8,678			13,247
Prepaid expenses and other current assets		12,902			13,453			12,259			13,339
Current assets of discontinued operations		57,345			47,920			45,495			49,963

Total current assets		291,976			168,310			234,862			168,310
Property and equipment, net		176,885			182,222			143,815			174,287
Other assets		11,652			24,716			22,416			15,983
Non-current assets of discontinued operations		1,232			119,290			3,083			135,958

Total assets	$	481,745		$	494,538		$	404,176		$	494,538


Current liabilities:
Accounts payable	$	19,957		$	15,716		$	17,088		$	15,550
Income tax payable		14,316			—			7,158			—
Accrued compensation and benefits		11,705			16,418			12,662			15,951
Other accrued liabilities		21,073			16,663			16,126			16,155
Current portion of long-term debt and obligations under capital leases		61,573			16,672			2,339			16,566
Current liabilities of discontinued operations		17,014			35,044			13,533			36,291

Total current liabilities		145,638			100,513			68,906			100,513
Long-term debt		—			52,500			—			52,500
Obligations under capital leases		5,822			6,500			4,295			5,999
Other long-term obligations		3,883			5,053			3,062			5,053
Long-term liabilities of discontinued operations		—			35,968			—			36,469

Total liabilities		155,343			200,534			76,263			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest in equity of consolidated subsidiaries		5,812			11,534
Redeemable noncontrolling interest								8,280			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; 22,262,431 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
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,270,012 issued and 20,315,651 outstanding at June 30, 2011 22,423,666 issued and 20,469,305 outstanding at September 30, 2010								216			216
Paid-in capital		457,952			457,725			458,729			457,725
Accumulated deficit		(102,752	)		(139,791	)		(103,916	)		(139,791	)
Accumulated other comprehensive loss		—			(444	)		—			(444	)
Treasury stock, at cost; 1,945,361 shares at December 31, 2010 and September 30, 2010		(44,797	)		(44,797	)
Treasury stock, at cost; 1,954,361 shares at June 30, 2011 and September 30, 2010								(44,797	)		(44,797	)

Total MedCath Corporation stockholders’ equity		310,619			272,909			310,232			272,909
Noncontrolling interest		9,971			9,561			9,401			9,561

Total equity		320,590			282,470			319,633			282,470

Total liabilities and equity	$	481,745		$	494,538		$	404,176		$	494,538

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended December 31,
	2010			2009			Three Months Ended June 30,						Nine Months Ended June 30,
							2011			2010			2011			2010
Net revenue	$	88,900		$	87,830		$	91,839		$	93,139		$	273,617		$	271,625
Operating expenses:
Personnel expense		32,454			31,636			31,514			31,090			96,490			93,950
Medical supplies expense		19,222			22,107			24,219			23,559			66,573			68,938
Bad debt expense		9,709			7,506			10,767			10,782			30,483			28,196
Other operating expenses		24,116			22,344			23,919			21,915			69,476			64,005
Pre-opening expenses		—			866			—			—			—			866
Depreciation		4,887			5,938			3,745			5,389			12,092			15,773
Loss on disposal of property, equipment and other assets		93			96
Impairment of property and equipment								810			22,813			20,358			37,513
(Gain) loss on disposal of property, equipment and other assets								(212	)		12			(141	)		43

Total operating expenses		90,481			90,493			94,762			115,560			295,331			309,284

Loss from operations		(1,581	)		(2,663	)		(2,923	)		(22,421	)		(21,714	)		(37,659	)
Other income (expenses):
Interest expense		(1,082	)		(945	)		(556	)		(1,050	)		(2,605	)		(3,046	)
Interest and other income		489			70			76			56			615			141
Gain on sale of unconsolidated investees		15,391			—
Loss on note receiveable								—			—			—			(1,507	)
Gain on sale of unconsolidated affiliates								—			—			15,391			—
Equity in net earnings of unconsolidated affiliates		602			1,516			303			1,391			1,679			3,984

Total other income (expense), net		15,400			641			(177	)		397			15,080			(428	)

Income (loss) from continuing operations before income taxes		13,819			(2,022	)
Income tax expense (benefit)		4,482			(1,337	)
Loss from continuing operations before income taxes								(3,100	)		(22,024	)		(6,634	)		(38,087	)
Income tax benefit								(1,862	)		(8,818	)		(5,370	)		(15,840	)

Income (loss) from continuing operations		9,337			(685	)
Income (loss) from discontinued operations, net of taxes		39,128			(1,130	)
Loss from continuing operations								(1,238	)		(13,206	)		(1,264	)		(22,247	)
Income from discontinued operations, net of taxes								15,260			2,745			53,475			1,283

Net income (loss)		48,465			(1,815	)		14,022			(10,461	)		52,211			(20,964	)
Less: Net income attributable to noncontrolling interest		(11,426	)		(841	)		(1,691	)		(2,355	)		(16,336	)		(5,718	)

Net income (loss) attributable to MedCath Corporation	$	37,039		$	(2,656	)	$	12,331		$	(12,816	)	$	35,875		$	(26,682	)


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	)
Loss from continuing operations, net of taxes							$	(3,088	)	$	(14,823	)	$	(8,754	)	$	(27,298	)
Income from discontinued operations, net of taxes								15,419			2,007			44,629			616

Net income (loss)	$	37,039		$	(2,656	)	$	12,331		$	(12,816	)	$	35,875		$	(26,682	)


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	)
(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath
Corporation common stockholders							$	(0.15	)	$	(0.74	)	$	(0.43	)	$	(1.38	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders								0.76			0.10			2.21			0.03

Earnings (loss) per share, basic	$	1.86		$	(0.13	)
(Loss) earnings per share, basic							$	0.61		$	(0.64	)	$	1.78		$	(1.35	)


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	)
(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath
Corporation common stockholders							$	(0.15	)	$	(0.74	)	$	(0.43	)	$	(1.38	)
Income from discontinued operations attributable to MedCath
Corporation common stockholders								0.76			0.10			2.21			0.03

Earnings (loss) per share, diluted	$	1.86		$	(0.13	)
(Loss) earnings per share, diluted							$	0.61		$	(0.64	)	$	1.78		$	(1.35	)


Weighted average number of shares, basic		19,943			19,743			20,245			19,897			20,132			19,823
Dilutive effect of stock options and restricted stock		4			—			7			—			6			—

Weighted average number of shares, diluted		19,947			19,743			20,252			19,897			20,138			19,823

MEDCATH CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

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

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

Total comprehensive income 45,416 3,493

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


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

Balance, September 30, 2010		22,424		$	216	$	457,725		$	(139,791	)	$	(444	)		1,954	$	(44,797	)	$	9,561		$	282,470		$	11,534
Stock awards, including cancelations and income tax benefit		18			—		3,282			—			—			—		—			—			3,282			—
Tax withholdings for vested restricted stock awards		(172	)		—		(2,278	)		—			—			—		—			—			(2,278	)		—
Distributions to noncontrolling interest		—			—		—			—			—			—		—			(10,444	)		(10,444	)		(3,560	)
Other transactions impacting noncontrolling interest		—			—		—			—			—			—		—			(64	)		(64	)		18
Exercise of call of noncontrolling interest		—			—		—			—			—			—		—			—			—			(5,700	)
Comprehensive income:
Net income		—			—		—			35,875			—			—		—			10,348			46,223			5,988
Reclassification of amounts included in net income, net of tax benefit (*)		—			—		—			—			444			—		—			—			444			—

Total comprehensive income																								46,667			5,988

Balance, June 30, 2011		22,270		$	216	$	458,729		$	(103,916	)	$	—			1,954	$	(44,797	)	$	9,401		$	319,633		$	8,280


(*)		Tax expense was $286 for the ~~quarter~~nine months ended ~~December 31, 2010.~~June 30, 2011.

See notes to unaudited consolidated financial statements.

MEDCATH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended December 31,						Nine Months Ended June 30,
	2010			2009			2011			2010
Net income (loss)	$	48,465		$	(1,815	)	$	52,211		$	(20,964	)
Adjustments to reconcile net income to net cash provided by operating activities:
(Income) loss from discontinued operations, net of taxes		(39,128	)		1,130
Income from discontinued operations, net of taxes								(53,475	)		(1,283	)
Bad debt expense		9,709			7,506			30,483			28,196
Depreciation		4,887			5,938			12,092			15,773
Gain on sale of unconsolidated investees		(15,391	)		—
Loss on disposal of property, equipment and other assets		93			96
(Gain) loss on disposal of property, equipment and other assets								(141	)		43
Share-based compensation expense		1,932			608			3,282			2,380
Gain on sale of unconsolidated affiliates								(15,391	)		—
Amortization of loan acquisition costs		313			252			1,104			745
Impairment of long-lived assets								20,358			37,513
Equity in earnings of unconsolidated affiliates, net of distributions received		(84	)		6,217			(583	)		3,397
Deferred income taxes		1,085			(103	)		(11,586	)		(14,966	)
Change in assets and liabilities that relate to operations:
Accounts receivable		(10,693	)		(12,106	)		(32,765	)		(33,174	)
Medical supplies		(94	)		(73	)		202			(1,455	)
Prepaid and other assets		2,266			(3,088	)		5,062			(1,422	)
Accounts payable and accrued liabilities		(2,825	)		(2,523	)		(7,221	)		1,082

Net cash provided by operating activities of continuing operations		535			2,039			3,632			15,865
Net cash (used in) provided by operating activities of discontinued operations		(5,131	)		1,496			(16,633	)		15,316

Net cash (used in) provided by operating activities		(4,596	)		3,535			(13,001	)		31,181

Investing activities:
Purchases of property and equipment		(157	)		(7,532	)		(2,295	)		(15,275	)
Proceeds from sale of property and equipment		418			70			281			103
Proceeds from sale of unconsolidated affiliates		31,851			—
Changes in restricted cash								(1,772	)		—
Proceeds from sale of unconsolidated afffiliates								24,851			—

Net cash provided by (used in) investing activities of continuing operations		32,112			(7,462	)		21,065			(15,172	)
Net cash provided by (used in) investing activities of discontinued operations		194,616			(1,774	)		232,469			(2,168	)

Net cash provided by (used in) investing activities		226,728			(9,236	)		253,534			(17,340	)

Financing activities:
Repayments of long-term debt		(7,662	)		(5,000	)		(66,563	)		(10,625	)
Repayments of obligations under capital leases		(614	)		(454	)		(1,869	)		(1,173	)
Distributions to noncontrolling interest		(4,504	)		(6,924	)		(7,380	)		(9,334	)
Investment by noncontrolling interest		—			153			—			109
Sale of equity interest in subsidiary		—			140			—			140
Tax withholding of vested restricted stock awards		(153	)		(253	)		(2,494	)		(293	)

Net cash used in financing activities of continuing operations		(12,933	)		(12,338	)		(78,306	)		(21,176	)
Net cash provided by financing activities of discontinued operations		(52,327	)		(9,083	)
Net cash used in financing activities of discontinued operations								(52,387	)		(15,324	)

Net cash used in financing activities		(65,260	)		(21,421	)		(130,693	)		(36,500	)


Net increase (decrease) in cash and cash equivalents		156,872			(27,122	)		109,840			(22,659	)
Cash and cash equivalents:
Beginning of period		47,030			61,701			47,030			61,701

End of period	$	203,902		$	34,579		$	156,870		$	39,042


Cash and cash equivalents of continuing operations		158,475			20,249			113,669			24,203
Cash and cash equivalents of discontinued operations		45,427			14,330			43,201			14,839

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, including the diagnosis and treatment of cardiovascular disease. The Company owns and operates hospitals in partnership with physicians. As of ~~December 31, 2010,~~June 30, 2011, 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, at June 30, 2011, the Company ~~currently owns~~owned 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 care. Each of the Company’s hospitals has a 24-hour emergency room staffed by emergency department physicians. The Company’s six hospitals that ~~currently~~ comprise continuing operations have 533 licensed beds and are located ~~in five states:~~in: Arizona, Arkansas, California, Louisiana, New Mexico, and Texas. Subsequent to June 30, 2011, the Company disposed of its interest in two hospitals located in Arkansas and New Mexico that had 167 licensed beds in total. See Note 16.

The Company accounts for all but one of its owned and operated hospitals as consolidated subsidiaries. The Company owns a noncontrolling interest in Harlingen Medical Center as of ~~December 31, 2010.~~June 30, 2011. Therefore, the Company is unable to consolidate this hospital’s results of operations and financial position, but rather is required to account for its noncontrolling interest in this hospital as an equity-method investment.

In addition to the hospitals, through May 4, 2011 the Company ~~currently owns~~owned or managed seven cardiac diagnostic and therapeutic facilities. On that date, the Company disposed of its interest in ownership and/or ~~manages seven~~management of these cardiac diagnostic and therapeutic facilities. Six of these facilities ~~are~~were located at hospitals operated by other parties. These facilities ~~offer~~offered invasive diagnostic and, in some cases, therapeutic procedures. The Company also ~~operates~~operated two mobile cardiac catheterization laboratories which ~~operate~~operated on set routes and ~~offer~~offered only diagnostic procedures. The Company refers to ~~its~~the diagnostics division that was disposed 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”) and MedCath Partners whose assets, liabilities, and operations are included within discontinued operations. AzHH, HHA, TexSan and ~~TexSan~~MedCath Partners were sold on October 1, 2010, November 1, 2010, ~~and~~ December 31, 2010 and May 4, 2011, 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 announced that its Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company’s equity or the sale of its individual hospitals and other assets. The Company retained Navigant Capital Advisors as its financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, the Company has completed several transactions, including:

	•		The disposition of 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)

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.

The disposition of MedCath Partners in which the Company sold the majority of the division’s assets to DLP Healthcare, a joint venture of Lifepoint Hospitals, Inc. and Duke University Health System for $25.0 million. The transaction was completed effective May 4, 2011.

The disposition of the Company’s 9.2% ownership interest in Coastal Carolina Heart to New Hanover Regional Medical Center for $5.0 million. The transaction was completed in May 2011.

Basis of Presentation— The Company’s unaudited interim consolidated financial statements as of ~~December 31, 2010~~June 30, 2011 and for the three and nine months ended ~~December 31,~~June 30, 2011 and 2010 ~~and 2009~~ have been prepared in accordance with accounting principles generally accepted in the United States of America ~~hereafter,~~ (“~~generally accepted accounting principles”~~GAAP”) 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, 2010. During the ~~three~~nine months ended ~~December 31, 2010,~~June 30, 2011, 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, 2010.

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. Many factors and assumptions can impact the estimates, including the future financial results of these hospitals, how the hospitals are operated in the future, changes in health care industry trends and regulations, and the nature and timing of the ultimate disposition of the assets. 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, which could change by material amounts in subsequent periods. 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.

Due to a decline in operating performance at certain hospitals during the first nine months of fiscal 2010, the Company performed impairment tests using undiscounted cash flows to determine if the carrying value of each hospital’s long-lived assets were recoverable as of June 30, 2010. The results indicated the current carrying value of the assets at those hospitals were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized impairment charges based on the amount each group of assets’ carrying value exceeded its fair value. The Company recorded $37.5 million and $5.2 million of impairment charges to continuing operations and discontinued operations, respectively during the nine months ended June 30, 2010. In addition, during the second quarter of fiscal 2010, as discussed previously, the Board of Directors formed a Strategic Options Committee to consider the sale either of the Company’s equity or the sale of its individual hospitals and other assets. In addition, the Company retained Navigant Capital Advisors as its financial advisor to assist in this process.

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

Throughout the remainder of fiscal 2010 and ongoing, the Company continuously evaluates the operating performance of the various hospitals and also evaluates the expressions of interest received for its ownership interests in the various hospitals. As a result of such period evaluations, the Company recorded an additional $29.4 million in impairment charges during the fourth quarter of fiscal 2010 through continuing and discontinued operations. To date, some of these assets have been sold at their carrying value. The impairment charges were recognized in the period that new or updated information pertaining to clear market indications of fair value became available. Such information included valid indications of interest, or signed letters of intent from interested buyers of the underlying assets, or based on updated discounted cash flow models using the Company’s long-term forecasts for the underlying assets. The short-term impact to the Company’s forecasts have been negatively impacted in some markets by the strategic options process as physician recruitment and the ability to implement growth strategies has become increasingly more difficult due to the uncertainty surrounding the process.

Due to a decline in operating performance at two hospitals during the first six months of fiscal 2011 and the uncertainty created at those hospitals as a result of the Company’s strategic options process, 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, 2011. The results indicated the carrying value of the assets at those hospitals were not recoverable. The Company compared the fair value of those assets to their respective carrying values in order to determine the amount of impairment. The Company recognized impairment charges based on the amount each group of assets’ carrying value exceeded its fair value at that date. In addition, the Company received an indicator of value for certain land during the third quarter of fiscal 2011 that was below the Company’s carrying value. Accordingly, the Company recorded $0.8 million and $19.5 million of impairment charges to continuing operations during the three and nine months ended June 30, 2011, respectively.

See Note 14 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

On October 1, 2010, the Company adopted a new accounting standard that amends the consolidation guidance that applies to variable interest entities (“VIE”). The amendments significantly affect the overall consolidation analysis. The provisions of this 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. 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~~Financial Accounting Standards Board (the “FASB”) issued Accounting Standard Updates (“ASU”) 2010-24, “Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries,” which clarifies that a health care entity should not net insurance recoveries against a related claim liability. The guidance provided in this ASU is effective as of the beginning of the first fiscal year beginning after December 15, 2010, fiscal 2012 for the Company. The Company is evaluating the potential impacts the adoption of this ASU will have on our consolidated financial statements.

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

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” regarding requirements for measuring fair value and for disclosing information about fair value measurements. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011, the second quarter of fiscal 2012 for the Company. It is not yet known what impact this ASU will have on the Company’s financial statements.

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

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this ASU. The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments in this ASU should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, fiscal 2013 for the Company, with early adoption permitted. The amendments do not require any transition disclosures.

In July 2011, the FASB issued ASU 2011-07, “Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities,” whereby a health care entity is required to present the provision for bad debts as a component of net revenues within the revenue section of the statement of operations. A health care entity that recognizes significant amounts of patient services revenue at the time the services are rendered even though it does not assess the patient’s ability to pay will be required to disclose the following:

Its policy for assessing the timing and amount of uncollectible patient service revenue recognized as bad debts by major payor source of revenue; and

Qualitative and quantitative information about significant changes in the allowance for doubtful accounts related to patient accounts receivable.

Public entities will be required to provide these disclosures and statement of operations presentation for fiscal years and interim periods within those years beginning after December 15, 2011, fiscal 2013 for the Company, with early adoption permitted. It is not yet known what impact this ASU will have on the Company’s financial statements.

3. Discontinued Operations

As required under ~~accounting principles generally accepted in the United States (“GAAP”),~~GAAP, the Company has classified the results of operations of the following entities within income from discontinued operations, net of taxes and the assets and liabilities of these entities have been classified within current and non-current assets and current and long-term liabilities of discontinued operations on the consolidated balance sheets.

Effective May 4, 2011 the Company sold the majority of the assets of its MedCath Partners division to DLP Healthcare, a joint venture of LifePoint Hospitals, Inc. and Duke University Health System. The transaction valued the assets sold at $25.0 million and involved the sale of certain North Carolina-based assets related to the operation of cardiac catheterization laboratories in North Carolina. MedCath has retained working capital related to the assets sold and also retained assets related to cath labs leased to two health care systems outside of North Carolina as well as its minority ownership in Coastal Carolina Heart. Further, MedCath retained certain assets and liabilities arising from this business that arose before closing. The transaction was completed effective May 4, 2011 with a gain of $21.3 million included in income (loss) from discontinued operations for the nine months ended June 30, 2011. As the MedCath Partners division met the criteria for classification as a discontinued operation, the previously reported gains and losses on sale of its equity interests have also been reclassified to discontinued operations. Such transactions are as follows:

Effective May 5, 2011, MedCath Partners sold its 9.2% ownership interest in Coastal Carolina Heart to New Hanover Regional Medical Center for $5.0 million and recognized a gain of $4.6 million.

On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New Jersey Heart Services, LLC for $0.6 million and recognized a gain of $0.2 million.

On November 1, 2010, MedCath Partners sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million. The Company recognized a $1.8 million write down of its investment in the fourth quarter of fiscal 2010 to record the Company’s investment in such business at its net realizable value expected from the sale proceeds.

During February 2010, MedCath Partners Division of the Company sold its 15.0% interest in Wilmington Heart Services, LLC for $0.4 million, resulting in 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 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~~nine months ended ~~December 31, 2010.~~June 30, 2011.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of HHA for $83.8 million plus retention of working capital to St. David’s Healthcare Partnership, ~~L.P, which resulted in a gain of $35.7 million.~~L.P. The transaction closed on November 1, 2010. The gain of $35.7 million has been included in income (loss) from discontinued operations for the nine months ended June 30, 2011.

During May 2008, ~~the Hospital Division of~~ the Company sold the net assets of Dayton Heart Hospital (“DHH”) to Good Samaritan Hospital pursuant to a definitive agreement. As of ~~December 31, 2010~~June 30, 2011 and September 30, 2010, the Company had reserved ~~$10.0~~$10.4 million and $9.8 million, respectively, for Medicare outlier payments received by DHH during the year ended September 30, 2004, which are included in current liabilities of discontinued operations in the consolidated balance sheets.

The Company has entered into transition services agreements with the buyers of 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. In addition, to facilitate collection of outstanding accounts receivable at such entities, on February 11, 2011 the Company entered into a Master Agreement for Revenue Cycle Outsourcing with Dell Marketing L.P. (“Dell”) whereby Dell would assume the responsibility for collection of outstanding accounts receivable for our current and disposed of entities. Furthermore, Dell retained the services of certain employees that had been employed by the Company on or before March 7, 2011 and effective March 1, 2011, Dell has sublet certain space that had been previously utilized by Company personnel involved in the collection of accounts receivable.

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

Three Months Ended December 31,
2010 2009

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

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

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

December 31, September 30,
2010 2010

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

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

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

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

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

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

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

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


	Three Months Ended June 30,					Nine Months Ended June 30,
	2011		2010			2011			2010
Net revenue	$	103	$	62,123		$	25,140		$	190,672
Gain from dispositions, net		25,947		—			95,850			—
Loss on early termination of debt		—		—			(11,130	)		—
Income before income taxes		24,808		3,828			81,232			866
Income tax (benefit) expense		9,548		1,083			27,757			(417	)

Net income		15,260		2,745			53,475			1,283
Less: Net loss (income) attributable to noncontrolling interest		159		(738	)		(8,846	)		(667	)

Net income attributable to MedCath Corporation	$	15,419	$	2,007		$	44,629		$	616

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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


	June 30,		September 30,
	2011		2010
Cash and cash equivalents	$	43,201	$	14,137
Accounts receivable, net		1,936		25,267
Other current assets		358		10,559

Current assets of discontinued operations	$	45,495	$	49,963


Property and equipment, net	$	2,011	$	123,605
Other assets		1,072		12,353

Long-term assets of discontinued operations	$	3,083	$	135,958


Accounts payable	$	11,514	$	25,545
Accrued liabilities and current portion of obligations under capital leases		2,019		10,746

Current liabilities of discontinued operations	$	13,533	$	36,291


Long-term debt	$	—	$	35,803
Other long-term obligations		—		666

Long-term liabilities of discontinued operations	$	—	$	36,469

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~~June 30, 2011 and September 30, 2010.

4. Accounts Receivable

Accounts receivable, net, consists of the following:


	December 31,			September 30,			June 30,			September 30,
	2010			2010			2011			2010
Receivables, principally from patients and third-party payors	$	106,804		$	103,314		$	119,893		$	103,314
Receivables, principally from billings to hospitals for various cardiovascular procedures		1,428			1,027
Other		2,975			2,555			2,311			1,912

		111,207			106,896			122,204			105,226
Less allowance for doubtful accounts		(66,412	)		(63,085	)		(77,781	)		(63,085	)

Accounts receivable, net	$	44,795		$	43,811		$	44,423		$	42,141

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

5. Investments in Affiliates

The Company’s determination of the appropriate consolidation method to follow with respect to investments in affiliates is based on the amount of control the Company has and the ownership level in the underlying entity. Investments in entities that the Company does not control, but over whose operations the Company has the ability to exercise significant influence (including investments where the Company has a less than 20% ownership) are accounted for under the equity method. The Company additionally considers if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At ~~December 31, 2010,~~June 30, 2011, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. At ~~December 31, 2010,~~June 30, 2011, the Company owns a noncontrolling interest in Harlingen Medical Center and certain ~~diagnostic ventures and~~other partnerships, for which the Company neither has substantive control over the ventures nor is the primary beneficiary. These investments are included in Other Assets on the consolidated balance sheets. In addition to these investments, the Company’s MedCath Partners division, which is presented as a discontinued operation, owned and/or disposed of certain investments prior to its disposition. Such investments and the gains/losses on dispositions are reflected in the assets and activities of discontinued operations.

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

~~On November 1, 2010,~~The 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 ~~sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0 million. The Company recognized a write down~~has disposed of its ~~investment in~~interest, the ~~fourth quarter~~operating activities have been included through their respective date of ~~fiscal 2010 to record~~disposition):


	Three Months Ended June 30,				Nine Months Ended June 30,
	2011		2010		2011		2010

Net revenue	$	27,437	$	44,877	$	84,787	$	130,775
Income from operations	$	2,719	$	6,391	$	10,503	$	18,551
Net income	$	812	$	4,130	$	4,677	$	11,825


	June 30,		September 30,
	2011		2010

Current assets	$	23,578	$	46,079
Long-term assets	$	75,710	$	111,262
Current liabilities	$	11,995	$	21,437
Long-term liabilities	$	96,337	$	120,451

6. Long-Term Debt

Long-term debt consists of the ~~Company’s investment in such business at its~~following:


	June 30,		September 30,
	2011		2010

Amended Credit Facility	$	—	$	66,563
Less current portion		—		(14,063	)

Long-term debt	$	—	$	52,500

On May 9, 2011 the Company used the net ~~realizable value expected~~proceeds from the sale ~~proceeds. Prior~~of MedCath Partners assets, along with available cash, to repay the $30.2 million then outstanding under its ~~disposition,~~credit facility and also terminated the ~~Company had accounted for its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity method of accounting.~~facility on that date.

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 “Amended Credit Facility”). The Amended Credit Facility ~~provides~~provided 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~~included 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~~bore interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or the alternate base rate plus the 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. As noted above, the Amended Credit Facility was terminated in May 2011.

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

On August 13, 2010, the Company and its lenders amended and restated the Senior Secured Credit Facility (the “First Amendment”). The Company entered into the First Amendment to provide additional financial and liquidity flexibility in connection with its previously announced effort to explore strategic alternatives. The First Amendment ~~contains~~contained modifications of certain financial covenants and other requirements of the Amended Credit Facility; including, but not limited to: modifications to certain definitions contained in the Amended Credit Facility, including the definitions of certain financial terms to permit additional add backs (such as an add back for charges and professional expenses incurred in connection with asset dispositions), subject to maximum amounts in certain cases, and to the multiple applied to certain of the financial metrics derived in accordance with such definitions, for certain financial covenant calculations; increasing the amount of permitted guarantees of indebtedness by $10 million; amending the asset dispositions covenant to permit additional asset dispositions subject to no events of default and require that any net cash proceeds from an asset disposition or series of dispositions in excess of $50 million from the date of the First Amendment be applied 50% to repay the outstanding Term Loan amounts under the Amended Credit Facility and 50% to repay amounts outstanding under the Revolver or cash collateralize letters of credit to the extent outstanding and permanently reduce the Revolver by 50% of the net cash proceeds, which could shorten the term of the Revolver based on the amount of such permanent commitment reductions. In addition, any mandatory prepayments of the Revolver ~~will~~ also ~~reduce~~reduced the revolving credit commitment by a corresponding amount.

~~In addition to the quarterly installment, during the three months ended December 31, 2010, the Company paid $4.8 million using net cash proceeds from asset dispositions.~~ The ~~Revolver including~~ letters of credit ~~will~~were not be permitted to remain outstanding after the full repayment of the Term ~~Loan. The First Amendment also provides for a reduction~~Loan in amount of the Revolver from $85 million to $59.5 million as of the date of the First Amendment. As noted under the terms of the First Amendment, the Revolver was further reduced to $54.4 million at December 31, 2010 for mandatory repayment of principal using net cash proceeds from asset dispositions. Under terms of the First Amendment, the fixed charge coverage ratio is not tested at September 30, 2010 or December 31, 2010, and will be retested at the fiscal quarter ending March 31,May 2011. Accordingly, effective May 2011, ~~and subsequent fiscal quarters.~~

~~As further noted in Note 14,~~ the Company ~~made~~cash collateralized the outstanding letters of credit such that they could remain outstanding. Accordingly, the Company has included $1.8 million of cash that is restricted by the outstanding letters of credit as an ~~additional $20.6 million repayment of outstanding principal in January 2011.~~other noncurrent asset.

Debt Covenants—As of ~~December 31, 2010 and~~ September 30, 2010, the Company was in compliance with all covenants governing its outstanding debt.

Interest Rate Swap— During the year ended September 30, 2006 one of the hospitals in which the Company had a noncontrolling interest and accounted for under the equity method, entered into an interest rate swap for purposes of hedging variable interest payments on long term debt outstanding for that hospital. The interest rate swap is accounted for as a cash flow hedge by the hospital whereby changes in the fair value of the interest rate swap flow through comprehensive income of the hospital. The Company recorded its proportionate share of comprehensive income within stockholders’ equity in the consolidated balance sheets based on the Company’s ownership interest in that hospital. However, as noted in Note 5, the cumulative unrealized loss of $0.5 million (net of taxes) was reclassified from Other Comprehensive Income as part of the gain in connection with the sale of the Company’s ownership interest on October 1, 2010.

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

7. Contingencies and Commitments

Put and Call Options— During August 2010, the Company entered into a put/call agreement with the minority shareholders of one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put allowed the Company’s noncontrolling shareholders in the hospital to put their shares to the Company for the net amount of the physician investors’ unreturned capital contributions. The noncontrolling shareholders’ recorded basis in their partnership interest was zero prior to the amendment of this agreement. Accordingly, the Company recognized a redeemable noncontrolling interest of $4.5 million ($2.9 million net of taxes) as of September 30, 2010. During December 2010, the Company exercised its call right and recognized additional redeemable noncontrolling interest of $2.2 million. Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling interest in this partnership together with amounts due from the noncontrolling shareholders into a net obligation of $5.7 million, of which ~~is included~~$4.6 million was paid during the nine months ended June 30, 2011 and $1.1 million remains in other accrued liabilities as of ~~December 31, 2010.~~June 30, 2011.

During September 2010, the Company entered into a call agreement with ~~the minority~~other shareholders of one of its hospitals whereby the Company may exercise the call right to purchase the noncontrolling interest owned by physician investors for an amount equal to the net amount of the physician investors unreturned capital contributions ($~~2.7~~2.6 million and $2.7 million at ~~December 31, 2010~~June 30, 2011 and September 30, ~~2010)~~2010, respectively).

~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables~~In January 2011, the Company entered into an agreement with the noncontrolling shareholders of one of its hospitals whereby the Company obtained the right to sell all or substantially all of the assets of that hospital. Concurrent with such amendment and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in ~~thousands, except percentages~~the hospital. The approval, consent and ~~per~~proxy allows the Company to sell all or substantially all of the assets of that hospital and the Company will pay to the noncontrolling members the net amount of their unreturned capital contributions ($3.5 million at June 30, 2011) adjusted upward for any proportionate share ~~data)~~of additional proceeds upon a disposition transaction.

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

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

~~In 2005,~~ CMS ~~began using~~uses recovery audit contractors (“RAC”) to detect Medicare overpayments not identified through existing claims review mechanisms. RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process. The Health Care Reform Laws 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 and Medicaid programs by the Company’s facilities have been accurate, however the Company is unable to reasonably estimate what the potential result of future RAC audits or other reimbursement matters could be.

The Company is involved in various claims and legal actions in the ordinary course of business, including malpractice claims arising from services provided to patients that have been asserted by various claimants and additional claims that may be asserted for known incidents through ~~December 31, 2010.~~June 30, 2011. These claims and legal actions are in various stages, and some may ultimately be brought to trial. Moreover, additional claims arising from services provided to patients in the past and other legal actions may be asserted in the future. The Company is protecting its interests in all such claims and actions and does not expect the ultimate resolution of these matters to have a material adverse impact on the Company’s consolidated financial position, results of operations or cash flows.

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

During fiscal years 2008 and 2007, the Company refunded certain reimbursements to CMS related to carotid artery stent procedures performed during prior fiscal years at two of the Company’s ~~consolidated subsidiary~~ hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company ~~began negotiating~~negotiated settlement agreements ~~during the second quarter of fiscal 2009~~ with the DOJ whereby the Company ~~was expected to pay~~paid $0.8 million to settle and obtain releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations did not involve patient care, and related solely to whether the procedures were properly reimbursable by Medicare. The settlement did not include any finding of wrong-doing or any admission of liability. ~~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.

InOn March 12, 2010, the ~~DOJ~~United States Department of Justice (“DOJ”) issued a ~~civil investigative demand~~Civil Investigative Demand (“CID”) ~~pursuant to the federal False Claims Act~~ to one of ~~our hospitals.~~the Company’s hospitals regarding implantable cardioverter defibrillators (“ICD”) implantations. The CID was issued in connection with an ongoing, national investigation relating to ICDs and Medicare coverage requirements for these devices. The CID requested ~~information~~certain documents and patient medical records regarding ~~Medicare claims submitted by our hospital in connection with~~ the implantation of ~~implantable cardioverter defibrillators (“ICDs”) during~~ICDs for the period 2002 to the present. The Company has provided materials responsive to the CID.

On September 17, 2010, consistent with letters received by other hospitals and hospital systems, DOJ sent a letter notifying the Company of DOJ’s investigation of eight Company hospitals regarding ICD implantations. In its letter, DOJ stated that its review was preliminary and its data suggests that Company hospitals may have submitted claims for ICDs and related services that were inconsistent with Medicare policy.

Based upon the Company’s legal advisors’ discussions and meetings with DOJ, the primary focus of the investigations involves ICDs implanted since October 1, 2003 within prohibited timeframes (i.e., timeframe violations). A “timeframe violation” involves an ICD implanted for “primary prevention” (i.e., prevention of sudden cardiac death in patients without a history of induced or spontaneous arrhythmias) within 30 days of a myocardial infarction, or within 90 days of a coronary artery bypass graft or percutaneous transluminal coronary angioplasty. The timeframes do not apply to ICDs implanted for “secondary prevention” (i.e., prevention of sudden cardiac death in patients who have survived a prior cardiac arrest or sustained ventricular tachyarrhythmia).

On November 19, 2010, DOJ provided the Company a spreadsheet detailing instances (based upon DOJ’s data) in which an ICD was implanted at the eight Company hospitals in potential violation of the applicable timeframes. The data provided by DOJ is “raw,” and the Company understands that, as of this date, such data had not been analyzed by DOJ. Additionally, DOJ confirmed that some of the ICDs identified in its data as alleged timeframe violations were in fact appropriately implanted and billed to Medicare, including those implanted for secondary prevention.

On February 17, 2011, legal counsel for the Company met with representatives of DOJ to discuss the agency’s review of the patient medical records provided in response to the CID. In addition to discussing DOJ’s review process, DOJ reconfirmed that certain ICD implantations were not being examined by the agency. As noted above, these include implantations prior to October 1, 2003 and implantations for secondary (rather than primary) prevention. With respect to primary prevention implantations, the Company discussed clinical comments supporting the implantations and agreed to additional meetings and presentations regarding those implantations for other Company hospitals. In that regard, the Company has engaged a physician-expert to assist with patient medical record reviews.

During the period March 2011 through July 2011, legal counsel for the Company has met on multiple occasions with representatives of DOJ to discuss the investigation and present preliminary findings regarding an internal review of a Company hospital other. These preliminary findings were submitted to DOJ, reviewed by its experts, and continue to be discussed by the parties. The Company intends to similarly present and submit findings for its other hospitals under investigation.

As discussed above, the Company has complied with all ~~information requested by the~~requests from DOJ for ~~this hospital. The~~information, is actively engaged in discussions with DOJ regarding the issues involved in the investigation, and continues developing and presenting arguments supporting the ICD implantations. Pursuant to DOJ’s request, the Company has entered into a tolling agreement that tolls the statute of limitations for allegations related to ICDs until October 2011. To date, DOJ has not asserted any claims against the Company and the Company expects to continue to have input into the investigation. Because the investigation is in its early stages, however, 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 Company’s other hospitals have submitted claims excluded from coverage. The period of time covered by the investigation is 2003 to the present. The letter states that the 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.investigations. The Company’s total ICD net revenue is a material component of total net patient revenue and the results of this investigation could have a material adverse effect on the Company’s financial condition, ~~and~~ results of ~~operations.~~operations and cash flows and a material adverse effect on the amount the Company is able to distribute to its stockholders in connection with the proposed liquidation and dissolution (see note 16).

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 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 out-patient services in the state of California.

During October, 2009, a purported class action law suit was filed by an individual against the Bakersfield Heart Hospital, a consolidated subsidiary of the Company. In the complaint the plaintiff alleges that under California law, and specifically under the Knox-Keene Healthcare Service Plan Act of 1975 and under the Health and Safety Code of California, California prohibits the practice of “balance billing” for patients who are provided emergency services. On November 24, 2010, the court granted the Bakersfield Heart Hospital’s motion to strike plaintiff’s class ~~allegations.~~allegations, which the plaintiff appealed. Thereafter, the parties discussed settlement and the matter settled in February 2011. The parties executed a Settlement and Release Agreement, and plaintiff dismissed his Complaint with prejudice and his pending appeal. Local counsel has advised that plaintiff’s counsel could locate another class representative to reinstitute the case, but the possibility became more remote as time passes due to the statute of limitations.

During June 2010 and 2009, the Company entered into a one-year claims-made policy providing coverage for medical malpractice claim amounts in excess of $2.0 million of retained liability per claim. The Company also purchased additional insurance to reduce the retained liability per claim to $250,000 for the MedCath Partners Division, for each respective fiscal year. Because of the Company’s self-insured retention levels, the Company is required to recognize an estimated expense/liability for the amount of retained liability applicable to each malpractice claim. As of ~~December 31, 2010~~June 30 2011 and September 30, 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 ~~$2.7~~$2.4 million and $2.5 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. As of October 9, 2010, the Company entered into a guaranteed cost plan for workman’s compensation. The Company was also covered by a guaranteed cost program up to September 2007. From October 2007 through 2010, the Company was self-insured with loss limitations of $250,000 per occurrence with no annual aggregate limits. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$3.0~~$2.2 million and $3.3 million as of ~~December 31, 2010~~June 30, 2011 and September 30, 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~~programs 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 and anesthesiology services, among other services. These guarantees extend for the duration of the underlying service agreements. As of ~~December 31, 2010,~~June 30, 2011, the maximum potential future payments that the Company could be required to make under these guarantees was ~~$25.9~~$25.6 million through May 2014. At June ~~2013. At December 31, 2010~~30, 2011 the Company had total liabilities of ~~$9.8~~$10.0 million for the fair value of these guarantees, of which ~~$6.6~~$7.5 million is in other accrued liabilities and ~~$3.2~~$2.5 million is in other long term obligations. Additionally, the Company had assets of ~~$10.2~~$10.5 million representing the future services to be provided by the physicians, of which ~~$6.5~~$7.5 million is in prepaid expenses and other current assets and ~~$3.7~~$3.0 million is in other assets.

8. ~~Per~~Earnings per Share Data

Basic— The calculation of basic earnings per share includes ~~150,900~~194,100 and ~~101,500~~150,900 of restricted stock units that have vested but as of ~~December 31,~~June 30, 2011 and 2010, ~~and 2009,~~ respectively, have not been converted into common stock.

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

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

Diluted— The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 782,562, and 971,637 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at June 30, 2011 and 2010, respectively. Dilutive options of 6,607 have been included in the calculation of diluted earnings (loss) per share for the three months ended June 30, 2011. Dilutive options of 6,146 have been included in the calculation of diluted earnings (loss) per share for the nine months ended June 30, 2011. Of the outstanding stock options, 758,750 options have not been included in the calculation of diluted earnings per share for the three and nine months ended June 30, 2011, because the options 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 tax.

9. Stock Based Compensation

Compensation expense from the grant of equity awards made to employees and directors are recognized based on the estimated fair value of each award over each applicable awards vesting period. The Company estimates the fair value of 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 ~~December 31, 2010 and 2009~~June 30, 2011 was ~~$1.9~~$0.4 million and ~~$0.6~~$3.3 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended ~~December 31, 2010 and 2009~~June 30, 2011 was ~~$0.8~~$0.2 million and $1.3 million, respectively. Stock based compensation expense recorded during the three and nine months ended June 30, 2010 was $0.6 million and $2.4 million, respectively. The associated tax benefits related to the compensation expense recognized for the three and nine months ended June 30, 2010 was $0.2 million and $1.0 million, respectively.

Stock Options

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


	For the Three Months Ended										For the Three Months Ended
	December 31, 2010					December 31, 2009					June 30, 2011					June 30, 2010
				Weighted-					Weighted-					Weighted-					Weighted-
	Number of			Average		Number of			Average		Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		932,137		$	21.89		1,027,387		$	22.25		854,812		$	21.86		975,637		$	22.14

Granted		—			—		—			—
Cancelled		(18,325	)		21.81		(40,750	)		22.94		(72,250	)		23.58		(4,000	)		16.91


Outstanding stock options, end of period		913,812		$	21.89		986,637		$	22.23		782,562		$	21.70		971,637		$	22.17

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

Restricted Stock Awards

~~There were no grants of restricted stock during~~During the three and nine months ended June 30, 2011 and the three months ended ~~December 31, 2010.~~June 30, 2010, the Company did not grant any shares of restricted stock to employees. During the ~~three~~nine months ended ~~December 31, 2009,~~June 30, 2010, the Company granted to employees ~~369,164~~401,399 shares of restricted stock. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company ~~defined~~(defined by the Company as vice president or ~~higher,~~higher) received two equal grants of restricted stock. The first grant vests annually in equal installments on December ~~of each year~~31 over a three year period. The second grant vests annually inon December ~~of each year,~~31 over a three year period if certain performance conditions are met. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. ~~At December 31,~~During the nine months ended June 30, 2011 and 2010, the Company granted 43,200 and 89,600 shares of restricted stock units to directors, respectively. No restricted stock units were granted during the three months ended June 30, 2011 and 2010. The restricted stock units granted to directors were fully vested at the date of grant. The Compensation Committee approved the termination of the restricted stock unit plan under which the restricted stock units were granted to directors and the units were paid to the directors in shares of common stock on August 1, 2011. At June 30, 2011, the Company had ~~$1.8~~$1.0 million of unrecognized compensation expense associated with restricted stock awards.

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


	For the Three Months Ended										For the Three Months Ended
	December 31, 2010					December 31, 2009					June 30, 2011					June 30, 2010
	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		884,285		$	8.67		654,327		$	9.64		476,012		$	8.53		1,025,700		$	8.49

Granted		—			—		369,164			6.99
Vested		(423,980	)		9.42		(90,195	)		9.30		(17,062	)		7.98		(37,800	)		7.56
Cancelled		—			—		(10,026	)		9.03		(5,850	)		7.40		(52,870	)		8.04


Outstanding restricted stock awards and units, end of period		460,305		$	7.99		923,270		$	8.54		453,100		$	8.57		935,030		$	8.63

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

13. Property and Equipment


	June 30,			September 30,
	2011			2010
Land	$	15,412		$	17,635
Buildings		134,483			149,704
Equipment		128,333			131,581
Construction in progress		545			25

Total, at cost		278,773			298,945
Less accumulated depreciation		(134,958	)		(124,658	)

Property and equipment, net	$	143,815		$	174,287

The Company recorded $0.8 million and $20.4 million of impairment charges to the consolidated statement of operations during the three and nine months ended June 30, 2011. See Note 1 for further discussion related to these impairment charges.

14. Fair Value Measurements

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

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

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

	•		Level 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~~discounted cash flows or third party appraisals.

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

~~14.~~15. Section 382 Rights Plan

On June 13, 2011, the Company entered into the Section 382 Rights Plan (the “Rights Plan”), between the Company and American Stock Transfer & Trust Company, LLC as rights agent. In connection with the adoption of the Rights Plan, on June 13, 2011, the Board of Directors of the Company declared a dividend of one preferred share purchase right (the “Rights”) for each outstanding share of common stock of the Company under the terms of the Plan. The dividend was paid on June 29, 2011 to the stockholders of record as of the close of business on June 29, 2011 (the “Record Date”). Each Right entitles the registered holder to purchase from the Company one one-thousandths of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”) at a price of $20.00 per one one-thousandths of a share of Preferred Stock, subject to adjustment.

By adopting the Plan, the Board is seeking to preserve for the Company’s stockholders the value or availability of certain of the Company’s tax attributes (the “Tax Attributes”). The Company currently has Tax Attributes which may entitle the Company to either reduce income taxes that may otherwise become due or to seek a refund of income taxes due with respect to the Company’s current fiscal 2011 tax year totaling up to as much as $40.0 million of tax reductions. These Tax Attributes may be materially reduced or eliminated by a “change of ownership” of the Company under Section 382 of the Internal Revenue Code (a “change of ownership”). If a change of ownership were to occur, the actual amount of Tax Attributes that could be materially reduced or eliminated would depend upon various factors, which among others include: (i) when the change of ownership occurred, (ii) the order in which certain hospitals owned by the Company are sold, (iii) the final sale price of certain hospitals owned by the Company and (iv) the timing of the liquidation of certain of the Company’s subsidiary limited liability companies or limited partnerships which have already sold their hospitals. Generally, a change of ownership will occur if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last change of ownership experienced by the Company.

The Plan is intended to act as a deterrent to any person acquiring 4.99% or more of the outstanding shares of the Company’s Common Stock or any existing 4.99% or greater holder from acquiring any additional shares without the approval of the Board. This would mitigate the threat that share ownership changes present to the Company’s Tax Attributes because changes in ownership by a person owning less than 4.99% of the Common Stock are not included in the calculation of “change of ownership” for purposes of Section 382 of the Internal Revenue Code. The Plan includes a procedure whereby the Board may consider requests to exempt certain proposed acquisitions of Common Stock from the applicable ownership trigger if the Board determines that the requested acquisition will not limit or impair the value or availability of the Tax Attributes to the Company.

The Rights will cause substantial dilution to a person or group that acquires 4.99% or more of the Common Stock on terms not approved by the Company’s Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board at any time prior to the first date that a person or group has become an Acquiring Person.

16. Subsequent Events

At the annual shareholder’s meeting on July 26, 2011, the majority of the Company’s shareholders approved the disposition of the Company’s equity in Arkansas Heart Hospital and, along with the Company’s physician partners, to sell certain assets and liabilities of Heart Hospital of New Mexico (the “Transactions”). Accordingly, the Company closed on the Transactions on August 1, 2011.

As the entities disposed of pursuant to the above Transactions did not qualify for discontinued operations treatment as of June 30, 2011, their assets and liabilities and results of operations are included in continuing operations. Accordingly, the Company has presented the supplementary results of operations and the assets and liabilities of these businesses as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2011			2010			2011			2010
Net revenue	$	49,759		$	50,811		$	148,798		$	146,628
Income before income taxes	$	4,431		$	6,183		$	19,897		$	17,389
Net income attributable to noncontrolling interest	$	(1,101	)	$	(1,491	)	$	(5,108	)	$	(4,111	)

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


	June 30,		September 30,
	2011		2010
Cash and cash equivalents	$	9,793	$	9,684
Accounts receivable, net		22,034		21,156
Other current assets		8,730		9,898

Current assets	$	40,557	$	40,738


Property and equipment, net	$	64,270	$	69,390
Other assets		1,259		2,091

Long-term assets	$	65,529	$	71,481


Accounts payable	$	9,279	$	7,013
Accrued liabilities and current portion of obligations under capital leases		11,677		14,863

Current liabilities	$	20,956	$	21,876


Obligations under capital leases, less current portion	$	3,641	$	5,044
Other long-term obligations		1,003		1,798

Long-term liabilities	$	4,644	$	6,842

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

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

~~In January 2011, the Company obtained from its noncontrolling members of one of its hospitals, the right~~proxy statement seeking (a) shareholder approval to sell all or substantially all of the remaining assets of that hospital. Concurrent with the granting of such right and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in the hospital. The approval, consent and proxy allows the Company prior to ~~sell all or substantially all~~filing a certificate of dissolution and approval of a series of distributions in complete liquidation of the ~~assets~~Company (as defined in Section 346(a) of ~~that hospital~~the Internal Revenue code of 1986, as amended), and (b) shareholder approval to dissolve the Company and the Plan of Complete Liquidation and Dissolution pursuant to which the Company will ~~pay~~be dissolved. If shareholder approval to dissolve the Company is obtained and the Board of Directors adopts a plan of dissolution then the Company will change its basis of accounting from the going-concern basis to the ~~noncontrolling members the net amount~~liquidation basis 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.~~accounting.


Item 2.		~~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 on~~~~Form 10-K~~for the fiscal year ended September 30, 2010.

Overview

General. We are a healthcare provider focused primarily on providing high acuity services, 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. 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,~~June 30, 2011, we ~~currently own~~owned interests in six hospitals, with a total of 533 licensed beds, of which 489 are staffed and available, and that are located ~~in five states:~~in: Arizona, Arkansas, California, Louisiana, New Mexico and Texas. Each of our ~~majority-owned~~ hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians. Subsequent to June 30, 2011, we disposed of our interest in two hospitals located in Arkansas and New Mexico that had 167 licensed beds.

In addition to our hospitals, through May 4, 2011, we ~~currently own~~owned and/or ~~manage~~managed seven cardiac diagnostic and therapeutic facilities. On that date, we disposed of our interest in these facilities. Six of these facilities ~~are~~were located at hospitals operated by other parties. These facilities ~~offer~~offered invasive diagnostic and, in some cases, therapeutic procedures. The remaining facility iswas not located at a hospital and ~~offers~~offered only diagnostic procedures. The Company also ~~operates~~operated two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.”

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

On March 1, 2010, we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of the Company or the sale of our individual hospitals and other assets. We retained Navigant Capital Advisors as our financial advisor to assist in this process. Since announcing the exploration of strategic alternatives on March 1, 2010, we have completed several transactions, ~~including:~~including the disposition of Arizona Heart Hospital, the disposition of our wholly owned subsidiary that held 33.3% ownership of Avera Heart Hospital of South Dakota, the disposition of Heart Hospital of Austin, the disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC, the disposition of TexSan Heart Hospital and the disposition of our MedCath Partners division. Since the completion of these sales (occurring before June 30, 2011), we have received $143.6 million in total cash proceeds, net of partner distributions and currently estimate that we may receive an additional $27.0 million to $28.0 million after we complete the liquidation of any remaining working capital and the estimated payment of income taxes for the legal entities we continue to own, but prior to any estimate for any unknown liabilities and contingencies. This estimate will be updated periodically during the wind-down of these entities.

	•		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.

Since March 1, 2010, we have incurred approximately $14.9 million in expenses directly related to the strategic options process. These costs include legal, consulting, board fees, retention bonuses and closing costs related to transactions. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown.

	•		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 as part of our strategic options process will be ~~successful, or~~successful. We do not know whether ~~future transactions~~our stockholders will ~~involve a sale of~~approve the ~~Company, a sale~~proposals included in the August proxy which was filed on August 5, 2011 as part of our ~~individual~~strategic options process. If those proposals are approved, we do not know whether we will be able to successfully sell our interests in our remaining hospitals orand our other ~~assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value.~~remaining assets. Although the strategic options process is on-going and expected to continue throughout fiscal ~~2011~~2012 and ~~potentially~~possibly beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders such as ~~special cash dividends and/or~~liquidating distributions ~~to stockholders following future sales~~as part of ~~individual hospitals or other assets or~~a plan of complete liquidation and as part of the dissolution of the Company as described in the ~~context of a dissolution, and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or~~August Proxy. However, many 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 may be required,~~ will affect the amount, timing and mechanics of any potential liquidating distributions to ~~stockholders. Until further progress is made in the strategic options process, we are unable to determine the approach that best meets the interests of our~~ stockholders. Final amounts available to stockholders will be diminished or affected by the payment or establishment of reserves to satisfy any liabilities arising out of the ICD investigation (see Note 7), other currently unknown or unanticipated liabilities and the establishment of a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate under the applicable law with respect to additional liabilities that may arise or be identified in connection with and after the dissolution of the Company which is described in the August Proxy, asset and corporate wind-down related operating and other expenses ~~continued debt service obligations,~~(all of which liabilities and reserves may be material), as well as the realization of certain tax ~~treatment,~~attributes, approvals that may be required to sell our remaining assets, the inability to collect all amounts owed ~~and any required reserves~~ to ~~address liabilities, including retained~~us and ~~contingent liabilities and/or~~ other unforeseen events.

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

Three Months Ended December 31,
Division 2010 2009
Hospital 97.4 % 96.1 %
MedCath Partners 2.5 % 3.8 %
Corporate and other 0.1 % 0.1 %

Net Revenue 100.0 % 100.0 %

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

Results of Operations

Three Months Ended ~~December 31, 2010~~June 30, 2011 Compared to Three Months Ended ~~December 31, 2009~~June 30, 2010

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

Three Months Ended December 31,
(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 )%

~~The following table presents selected operating data on a consolidated basis for the periods indicated:~~


	Three Months Ended June 30,
	(in thousands except percentages)
							Increase/
							(Decrease)			% of Net Revenue
	2011			2010			%			2011			2010
Net revenue	$	91,839		$	93,139			(1.4	)%		100.0	%		100.0	%
Operating expenses:
Personnel expense		31,514			31,090			1.4	%		34.3	%		33.4	%
Medical supplies expense		24,219			23,559			2.8	%		26.4	%		25.3	%
Bad debt expense		10,767			10,782			(0.1	)%		11.7	%		11.5	%
Other operating expenses		23,919			21,915			9.1	%		26.0	%		23.5	%
Depreciation		3,745			5,389			(30.5	)%		4.1	%		5.8	%
Impairment of property and equipment		810			22,813			100.0	%		0.9	%		24.5	%
(Gain) loss on disposal of property, equipment and other assets		(212	)		12			1866.7	%		—			—

Loss from operations		(2,923	)		(22,421	)		(87.0	)%		(3.2	)%		(24.1	)%
Other income (expenses):
Interest expense		(556	)		(1,050	)		(47.0	)%		(0.5	)%		(1.1	)%
Interest and other income		76			56			35.7	%		—			—
Equity in net earnings of unconsolidated affiliates		303			1,391			(78.2	)%		0.3	%		1.5	%

Loss from continuing operations before income taxes		(3,100	)		(22,024	)		(85.9	)%		(3.4	)%		(23.7	)%
Income tax benefit		(1,862	)		(8,818	)		(78.9	)%		(2.0	)%		(9.5	)%

Loss from continuing operations		(1,238	)		(13,206	)		(90.6	)%		(1.2	)%		(14.2	)%
Income from discontinued operations, net of taxes		15,260			2,745			455.9	%		16.6	%		2.9	%

Net income (loss)		14,022			(10,461	)		(234.0	)%		15.3	%		(11.2	)%
Less: Net income attributable to noncontrolling interest		(1,691	)		(2,355	)		(28.2	)%		(1.8	)%		(2.5	)%

Net income (loss) attributable to MedCath Corporation	$	12,331		$	(12,816	)		(196.2	)%		13.4	%		(13.8	)%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(3,088	)	$	(14,823	)		(79.2	)%		(3.4	)%		(15.9	)%
Income from discontinued operations, net of taxes		15,419			2,007			668.3	%		16.8	%		2.2	%

Net income (loss)	$	12,331		$	(12,816	)		(196.2	)%		13.4	%		(13.8	)%

Three Months Ended December 31,
2010 2009 % Change

Selected Operating Data (a):

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


	Three Months Ended June 30,
	2011			2010			% Change

Selected Operating Data (a):
Number of hospitals		5			5
Licensed beds (b)		421			421
Staffed and available beds (c)		380			380
Admissions (d)		4,779			4,835			(1.2	)%
Adjusted admissions (e)		7,249			7,300			(0.7	)%
Patient days (f)		17,672			18,223			(3.0	)%
Adjusted patient days (g)		26,939			27,546			(2.2	)%
Average length of stay (days) (h)		3.70			3.77			(1.9	)%
Occupancy (i)		51.1	%		52.7	%
Inpatient catheterization procedures (j)		2,002			2,048			(2.2	)%
Inpatient surgical procedures (k)		1,125			1,216			(7.5	)%
Hospital net revenue (in thousands except percentages)	$	91,766		$	93,030			(1.4	)%


(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 decreased 1.4% or $1.3 million, to $91.8 million for the third quarter of fiscal 2011 from $93.1 million for the third quarter of fiscal 2010.

Inpatient net revenue declined 0.4%, while inpatient cases increased 0.4% in the third quarter of fiscal 2011 compared to the same period of the prior year. Inpatient net patient revenue was 67.3% and 68.9% of total net patient revenue for the fiscal quarter ending June 30, 2011 and June 30, 2010, respectively. Total cardiovascular related inpatient net revenue was 68.4% of total net inpatient revenue for the third fiscal quarter of 2011 versus 69.1% for the third fiscal quarter of fiscal 2010. The decline in cardiovascular related net revenue as a percentage of total net inpatient revenue is a direct result of the net revenue from Hualapai Mountain Medical Center (“HMMC”), our general acute care hospital which began operations at the beginning of fiscal 2010 and a decline in cardiovascular procedures with high reimbursement rates such as open heart and AICD procedures.

Our outpatient net patient revenue increased 7.3% during the third quarter of fiscal 2011 compared to the same period of the prior year. Our outpatient cases, excluding emergency department visits, increased 9.2% during the third fiscal quarter ending June 30, 2011 compared to the same period of the prior year. Our emergency department visits increased 8.0% during the third quarter ending June 30, 2011 compared to the same period of the prior year. Our outpatient net revenue benefited from a 9.5% increase in outpatient cases at HMMC, which has seen an increase in cases since it began operations at the beginning of fiscal 2010.

Net revenue for the third quarter of fiscal 2011 included charity care deductions of $1.7 million compared to charity care deductions of $1.4 million for the third quarter of fiscal 2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.Our consolidated hospital division personnel expense increased 1.4%, or $0.4 million, to $31.5 million, or 34.3% of net revenue, for the third quarter of fiscal 2011 from $31.1 million, or 33.4% of net revenue, for the third quarter of fiscal 2010.

The $0.4 million increase in personnel expense is due an increase in cases at certain of our hospitals. This increase was offset by a $0.7 million decline in hospital division bonus expense due to certain hospitals not meeting bonus targets based on year-to-date operating results.

Medical supplies expense.Our consolidated medical supplies expense increased 2.8%, or $0.6 million, to $24.2 million for the third quarter of fiscal 2011 from $23.6 million for the third quarter of fiscal 2010.

The $0.6 million increase in medical supplies expense is a result of an increase in cases utilizing high dollar orthopedic devices and an increase in chargeable medical supplies at one of our hospitals as a result of an increase length of stay. These increases were offset by a reduction in sales tax expense on certain medical supplies. We have been able to reduce our overall sales tax expense on medical supplies at certain of our hospitals as a result of a sales tax review completed during the first fiscal quarter of 2011.

Bad debt expense.Our consolidated bad debt expense decreased 0.1% to $10.8 million for the third quarter of fiscal 2011 from $10.8 million for the third quarter of fiscal 2010. As a percentage of net revenue, bad debt expense increased slightly to 11.7% for the third quarter of fiscal 2011 as compared to 11.5% for the comparable period of fiscal 2010.

Our net accounts receivable primarily includes amounts due from patients and third-party payors and amounts due for third-party payor settlements. Third-party payor settlements include amounts due related to prior filed cost reports and estimated future cost report filings. Our net accounts receivable due from patients and third-party payors, excluding amounts due for the settlement of cost reports, was $44.4 million at June 30, 2011 and $44.3 million, at June 30, 2010. Our third-party net accounts payable for the settlement of cost reports was $2.4 million and $2.9 million as of June 30, 2011 and 2010, respectively. Of this amount, $2.1 million and $2.6 million was related to prior fiscal year cost reports as of June 30, 2011 and 2010, respectively.

We compute our allowance for doubtful accounts based on a liquidation percentage by hospital. This liquidation (or bad debt) percentage is based on a twelve month hindsight analysis computed on a monthly basis while considering any current trends or changes in payor mix that could impact historical collection percentages. We reserve for the estimate of uncollectible self-pay accounts at the time the revenue is recognized. As a result, an increase in self-pay admissions will increase the bad debt expense and the allowance for doubtful accounts most significantly in the period in which the service is rendered.

Our net patient accounts receivable outstanding by payor group excluding amounts due from third-party payors for the settlement of cost reports as of June 30, 2011 and 2010 was as follows:


	Net Patient Accounts Receivable
	Outstanding
	(in thousands)
Payor Group	June 30, 2011		June 30, 2010
Medicare	$	16,281	$	15,933
Medicaid (1)		3,183		3,683
Self-pay (2)		5,675		4,826
Commercial & Other		19,388		18,792


Total	$	44,527	$	43,234


(1)		Medicaid includes accounts receivable that are pending approval from Medicaid.

(2)		Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance (34.1% and 18.3% of total self-pay net accounts receivable outstanding at June 30, 2011 and 2010, respectively) and the self-pay portion due after insurance and government programs (65.9% and 81.7% of total self-pay net accounts receivable outstanding at June 30, 2011 and 2010, respectively).

The below table reflects the percentage of net patient accounts receivable, excluding amounts due for the settlement of cost reports, by aging group as of June 30, 2011:


	Days Outstanding
	As of June 30, 2011
Payor Group	0-30			31-60				61-120			121-150			151-180			+181			Total
Medicare		55.7	%		25.0	%			16.1	%		13.6	%		10.9	%		4.6	%		36.6	%
Medicaid (1)		4.4	%		9.6	%			12.5	%		8.1	%		10.8	%		9.0	%		7.1	%
Self-pay (2)		1.7	%		6.9	%			17.1	%		28.6	%		21.1	%		54.6	%		12.7	%
Commercial & Other		38.2	%		58.5	%			54.3	%		49.7	%		57.2	%		31.8	%		43.6	%


Total		100.0	%		100.0	%			100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
							��


(1)		Medicaid includes accounts receivable that are pending approval from Medicaid.

(2)		Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance.

The below table reflects the percentage of net patient accounts receivable, excluding amounts due for the settlement of cost reports, by aging group as of June 30, 2010:


	Days Outstanding
	As of June 30, 2010
Payor Group	0-30			31-60			61-120			121-150			151-180			+181			Total
Medicare		55.5	%		22.1	%		11.1	%		3.9	%		10.1	%		7.5	%		36.9	%
Medicaid (1)		4.7	%		9.7	%		12.5	%		19.9	%		26.8	%		13.3	%		8.5	%
Self-pay (2)		0.7	%		5.6	%		16.6	%		30.4	%		27.9	%		54.8	%		11.2	%
Commercial & Other		39.1	%		62.6	%		59.8	%		45.8	%		35.2	%		24.4	%		43.4	%


Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%


(1)		Medicaid includes accounts receivable that are pending approval from Medicaid.

(2)		Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance.

For the quarter ended June 30, 2011, bad debt expense was 11.7% of net patient revenue, compared to 11.5% in the prior year. Our days sales outstanding for our hospital division net accounts receivable, excluding amounts due from third-party payors related to the settlement of cost reports, were 44 and 43 at June 30, 2011 and 2010, respectively.

Other operating expenses.Our consolidated other operating expenses increased 9.1%, or $2.0 million to $23.9 million for the third quarter of fiscal 2011 from $21.9 million for the third quarter of fiscal 2010.

The increase in other operating expenses is primarily driven by the professional fees incurred as a result of our strategic options process. We incurred $2.7 million in professional fees during the third quarter of fiscal 2011 related to our strategic options process. These costs include legal, consulting and board fees. We began our strategic options process in March of last year and incurred $1.4 million of strategic options expenses during the third quarter of fiscal 2010. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown. We also incurred a $0.4 million increase in medical claims expense during the third quarter of fiscal 2011 compared to the same period of the prior year due to an increase in claims filed by our employees and a $0.3 million increase in maintenance expense as our facilities continue to age. These increases were offset by a decline in primary care physician practice expenses at one of our hospital due to a reduction in the number of physicians within the practice.

Depreciation expense.Depreciation expense decreased $1.7 million to $3.7 million for the third quarter of fiscal 2011 from $5.4 million for the second quarter of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded before the third quarter of fiscal 2011.

Impairment expense.Impairment expense decreased $22.0 million to $0.8 million for the third quarter of fiscal 2011 from $22.8 million for the third quarter of fiscal 2010. During the third quarter of fiscal 2011, the Company recognized an impairment of certain assets maintained at corporate due to indicators of value received during the Company’s strategic options process. During the third quarter of fiscal 2010, the Company recognized an impairment of property and equipment at and certain assets maintained at corporate and one of its hospitals due to declines in operating performance as well as the ongoing review of strategic alternatives for the Company.

Interest expense.Interest expense decreased $0.5 million to $0.6 million for the third quarter of fiscal 2011 from $1.1 million for the third quarter of fiscal 2010. The decrease in interest expense is principally due to the reduction in amounts outstanding under the Company’s Senior Secured Credit Facility, partially offset by an increase in the amount of assets under capital leases.

Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in unconsolidated hospitals and a hospital realty investment. The Company owned two unconsolidated hospitals until the disposition of its interest in Avera Heart Hospital of South Dakota (“AHHSD”) on October 1, 2010.

Equity in net earnings of unconsolidated affiliates decreased during the third quarter of fiscal 2011 to $0.3 million from $1.4 million for the same period of fiscal 2010. AHHSD contributed $1.2 million of net earnings during the third quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings.

Income tax benefit.Income tax benefit was $(1.9) million for the third quarter of fiscal 2011 compared to $(8.8) million for the third quarter of fiscal 2010, which represents an effective tax rate of (60.1%) and (40.0%) for the respective periods. The third quarter fiscal 2011 and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests. The Company has recognized a disproportionate share of losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and committed capital of the Company’s partners or members.

(Loss) income from discontinued operations, net of taxes.Income from discontinued operations, net of taxes increased $12.5 million for the third quarter of fiscal 2011 from $2.7 million for the comparable period of fiscal 2010. During the third quarter of fiscal 2011, the Company disposed of its interest in MedCath Partners and CCH and recognized a pre-tax gain on disposition of $25.9 million. In addition, the Company recognized an impairment of $5.2 million to property and equipment at one of its discontinued hospitals during the third quarter of fiscal 2010. Such impairment was partially offset by the operating activities of another of the Company’s discontinued hospitals.

Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries decreased to $1.7 million for the third quarter of fiscal 2011 from $2.4 million for the comparable period of fiscal 2010.

We recognize a disproportionate share of losses for certain of our entities. The increase in net income attributable to noncontrolling interest is the result of us absorbing more losses during the current period compared to the prior year. 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 Policiesfor the fiscal year ended September 30, 2010.

Results of Operations

Nine Months Ended June 30, 2011 Compared to Nine Months Ended June 30, 2010

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
	2011			2010			%			2011			2010
Net revenue	$	273,617		$	271,625			0.7	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		96,490			93,950			2.7	%		35.3	%		34.6	%
Medical supplies expense		66,573			68,938			(3.4	)%		24.3	%		25.4	%
Bad debt expense		30,483			28,196			8.1	%		11.1	%		10.4	%
Other operating expenses		69,476			64,005			8.5	%		25.5	%		23.6	%
Pre-opening expenses		—			866			(100.0	)%		—			0.3	%
Depreciation		12,092			15,773			(23.3	)%		4.4	%		5.8	%
Impairment of property and equipment		20,358			37,513			100.0	%		7.4	%		13.8	%
(Gain) loss on disposal of property, equipment and other assets		(141	)		43			(427.9	)%		—			—

Loss from operations		(21,714	)		(37,659	)		(42.3	)%		(7.9	)%		(13.9	)%
Other income (expenses):
Interest expense		(2,605	)		(3,046	)		(14.5	)%		(1.0	)%		(1.1	)%
Interest and other income		615			141			336.2	%		0.2	%		0.1	%
Loss on note receiveable		—			(1,507	)		100.0	%		—			(0.6	)%
Gain on sale of unconsolidated affiliates		15,391			—			100.0	%		5.6	%		—
Equity in net earnings of unconsolidated affiliates		1,679			3,984			(57.9	)%		0.6	%		1.5	%

Loss from continuing operations before income taxes		(6,634	)		(38,087	)		(82.6	)%		(2.5	)%		(14.0	)%
Income tax benefit		(5,370	)		(15,840	)		(66.1	)%		(2.0	)%		(5.8	)%

Loss from continuing operations		(1,264	)		(22,247	)		(94.3	)%		(0.5	)%		(8.2	)%
Income from discontinued operations, net of taxes		53,475			1,283			4068.0	%		19.5	%		0.5	%

Net income (loss)		52,211			(20,964	)		(349.1	)%		19.1	%		(7.7	)%
Less: Net income attributable to noncontrolling interest		(16,336	)		(5,718	)		185.7	%		(5.9	)%		(2.1	)%

Net income (loss) attributable to MedCath Corporation	$	35,875		$	(26,682	)		(234.5	)%		13.1	%		(9.8	)%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(8,754	)	$	(27,298	)		(67.9	)%		(3.2	)%		(10.0	)%
Income from discontinued operations, net of taxes		44,629			616			7145.0	%		16.3	%		0.3	%

Net income (loss)	$	35,875		$	(26,682	)		(234.5	)%		13.1	%		(9.8	)%


	Nine Months Ended June 30,
	2011			2010			% Change

Selected Operating Data (a):
Number of hospitals		5			5
Licensed beds (b)		421			421
Staffed and available beds (c)		380			380
Admissions (d)		14,115			14,244			(0.9	)%
Adjusted admissions (e)		21,308			21,051			1.2	%
Patient days (f)		52,741			53,588			(1.6	)%
Adjusted patient days (g)		80,088			79,461			0.8	%
Average length of stay (days) (h)		3.74			3.76			(4.1	)%
Occupancy (i)		50.8	%		51.7	%
Inpatients with a catheterization procedure (j)		5,731			6,073			(5.6	)%
Inpatient surgical procedures (k)		3,343			3,474			(3.8	)%
Hospital net revenue (in thousands except percentages)	$	273,379		$	271,293			0.8	%


(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 isare 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 isare 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 ~~1.2%~~0.7%, or ~~$1.1~~$2.0 million, to ~~$88.9~~$273.6 million for the ~~first quarter of fiscal~~nine months ended June 30, 2011 from ~~$87.8~~$271.6 million for the ~~first quarter of fiscal~~nine months ended June 30, 2010. Hospital Division net revenue increased 2.6%, or $2.2 million, for the first quarter of fiscal 2011 compared to the same period of fiscal 2010. There was a $1.1 million decrease in net revenue in our MedCath Partners Division.

Inpatient net revenue was ~~69%~~68.7% of the ~~Hospital Division’s~~ net patient revenue for the first ~~quarter~~nine months of fiscal 2011 compared to ~~71%~~70.5% for the same period of the prior year. Our total inpatient cases were down 1.0% and inpatient net revenue was down 2.6% 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~~nine months of fiscal 2011 compared to the first ~~quarter~~nine months of fiscal ~~2010, whereas outpatient~~2010. Outpatient net revenue ~~and cases~~ increased ~~9.3% and 31.5%, respectively during the same period.~~

~~The decrease in inpatient net revenue is~~5.9% 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”),~~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 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, particularly related to emergency department cases.

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

Net revenue for the first ~~quarter~~nine months of fiscal 2011 included charity care deductions of ~~$2.1~~$6.2 million compared to charity care deductions of ~~$1.9~~$5.2 million for the first ~~quarter~~nine months of fiscal 2010. The $1.0 million increase is the result of more uninsured patients applying and qualifying for charity care.

Personnel expense.Our consolidated personnel expense increased 2.7%, or $2.5 million, to $96.5 million for the nine months ended June 30, 2011 from $94.0 million for the nine months ended June 30, 2010.

Personnel expense increased ~~2.6%, or~~ $0.9 million ~~to $32.5 million for the first quarter of fiscal 2011 from $31.6 million for the first quarter of fiscal 2010.~~

~~The increase in personnel expense was primarily~~ due to ~~a $1.3 million~~an increase in stock based ~~compensation expense.~~compensation. As part of the strategic options process and the impact that certain related events may have on non-deductibility of executive compensation, 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 2011 to ensure the deductibility of the compensation expense for federal corporate income tax purposes. The waiver caused all future stock based compensation ~~expense~~ related to the shares that would have vested over time as performance criteria were met to be recognized during the first quarter of fiscal 2011. The shares subject to the waiver of vesting criteria ~~contain transfer~~continue to maintain sell restrictions that will ~~remain in place until~~be lifted upon a change in control of the Company. In addition, management updated the estimate on the restricted share forfeiture rate since it is anticipated that the rate of employee turnover will decline as we continue to progress with our strategic options process. We also experienced a ~~$0.5~~$1.1 million increase in expense related to hospital employee healthcare ~~claims. This expense is directly attributed~~claims attributable to an increase in the number of claims reported during the ~~period.~~period and a $0.4 million increase in workers compensation expense as a result of transitioning to a first dollar coverage plan during fiscal 2011. These increases were offset by a ~~$0.9 million~~ decline in ~~salaries and wages and related benefits~~bonus expense as ~~we continue to monitor costs to better align these costs with net revenues and as the~~a result of ~~a reduction in management positions within hospital division as we sell our hospital assets.~~lower current year operations compared to bonus attainment targets.

Medical supplies expense.~~Medical~~Our consolidated medical supplies expense decreased ~~13.1%~~3.4%, or ~~$2.9~~$2.3 million, to ~~$19.2~~$66.6 million for the first ~~quarter~~nine months of fiscal 2011 from ~~$22.1~~$68.9 million for the first ~~quarter~~nine months of fiscal 2010. ~~This~~

The decline in medical supplies expense is primarily due to ~~$2.9~~$3.5 million in sales tax refunds and reductions at two of our hospitals. Absent the refunds, medical supplies expense ~~was flat~~increased $1.2 million year over ~~year. Medical supplies expense increased $0.7 million~~year due to an increase in utilization of high dollar devices at ~~HMMC which began operations in the second month~~certain of our hospitals during the first quarter of fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was offset by a decline in ICD expense as the result of a 7.6% decline in ICD procedures for the first quartersix months of fiscal 2011 compared to the same period of the prior year.

Bad debt expense.~~Bad~~Our consolidated bad debt expense increased ~~29.3%, or $2.2 million,~~8.1% to ~~$9.7~~$30.5 million for the first ~~quarter~~nine months of fiscal 2011 from ~~$7.5~~$28.2 million for the first ~~quarter~~nine months of fiscal 2010. As a percentage of net revenue, bad debt expense increased to ~~10.9%~~11.1% for the first ~~quarter~~nine months of fiscal 2011 as compared to ~~8.5%~~10.4% for the comparable period of fiscal 2010. This increase is ~~due~~attributable to a ~~68.8%, or $3.2~~$7.1 million increase in self-pay ~~net~~ revenue for the first ~~quarter~~nine months of fiscal 2011 compared to the same period of the prior year offset by improved collection on accounts receivable during fiscal 2011. Our days sales outstanding for the first nine months of fiscal 2011 and fiscal 2010 were 44.

Other operating expenses.Our consolidated other operating expenses increased 8.5%, or $5.5 million, to $69.5 million for the first nine months of fiscal 2011 from $64.0 million for the first nine months of fiscal 2010.

Our legal and professional fees were $5.5 million higher for the first nine months of fiscal 2011 compared to the first ~~quarter~~nine months of fiscal 2010. We reserve for the estimated bad debt on self-pay net revenue at the time of recognition based on our historical collection experience related to self-pay patients. This increase was offset by lower bad debt expense in certain markets due to lower net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.

~~Other operating expenses.~~Other operating expenses increased 7.9%, or $1.8 million, to $24.1 million for the first quarter of fiscal 2011 from $22.3 million for the first quarter of fiscal 2010. The material and notable increases (decreases) in operating expenses were as reflected below (in millions):

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

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

Our purchased services — nonclinical expense includes $1.3 million in third party consulting fees to obtain sales tax refunds on medical supplies at certain of our hospitals. As noted above under medical supplies expense, we filed sales tax refund claims of $2.9 million during the first quarter of fiscal 2011. The increase2010 directly related to the ~~consulting~~ fees ~~was offset by declines in non-clinical services as we control costs to better align with our net revenues.~~

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

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~~related to our strategic options process. ~~We hired several key executives during the first quarter of fiscal 2010, which contributed~~These costs include legal, consulting and board related fees. Our strategic options costs will continue to ~~a higher expense in the prior year compared to the first quarter of fiscal 2011. In addition,~~be material and we ~~have incurred 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 has decreased the total number of physicians within the practice. Conversely, there was a $0.4 million decline in revenuesmay incur material costs related to ~~the primary care practice.~~contingencies that are currently unknown.

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

Depreciation expense.Depreciation expense decreased ~~$1.0~~$3.7 million to ~~$4.9~~$12.1 million for the first ~~quarter~~nine months of fiscal 2011 from ~~$5.9~~$15.8 million for the first ~~quarter~~nine months of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded inbefore the ~~second and fourth quarters~~third quarter of fiscal ~~2010.~~2011.

Impairment expense.Impairment expense decreased $17.1 million to $20.4 million for the first nine months of fiscal 2011 from $37.5 million for the first nine months of fiscal 2010. During the first nine months of fiscal 2011, the Company recognized an impairment of property and equipment at corporate and at two of its hospitals due to declines in operating performance as well as the uncertainty at those hospitals as a result of the Company’s strategic options process. During the first nine months of fiscal 2010, the Company recognized an impairment of property and equipment at one of its hospitals due to declines in operating performance as well as the ongoing review of strategic alternatives for the Company.

Interest expense.Interest expense ~~increased $0.2~~decreased $0.4 million or 14.5% to ~~$1.1~~$2.6 million for the first ~~quarter~~nine months of fiscal 2011 from ~~$0.9~~$3.0 million for the first ~~quarter~~nine months of fiscal 2010. The ~~increase~~decrease in interest expense is primarily attributable to the overall reduction in our outstanding debt, partially offset by a slight increase in the rate charged on outstanding debt and an increase in the amount of assets under capital leases. The Company expects continued decreases in interest expense due to the repayment of amounts outstanding under, and the termination of, the Amended Credit Facility during May 2011.

Loss on note receivable.Our corporate and other division entered into a note receivable agreement with a third party during 2008. Certain minority membership interest of one of our hospitals was pledged as collateral to secure the note receivable on behalf of the third party. An impairment of the long-lived assets of the hospital in which the minority membership interest was pledged as collateral for the note receivable was recorded during the second quarter of fiscal 2010 due to sustained losses and insufficient forecasted cash flow. The note receivable was deemed uncollectable and a loss of $1.5 million was recorded in the first nine months of fiscal 2010 due to our determination of the third party’s inability to service the note and the insufficiency of the value of the collateral securing the note.

Gain on sale of equity interests.The gain on sale of equity interests of $15.4 million for the first ~~quarter~~nine months of fiscal 2011 is related to the sale of our interest in ~~Avera Heart Hospital of South Dakota (“AHHSD”) partially offset by a nominal loss on the sale of the Company’s interest in Southwest Arizona Heart and Vascular Center, LLC. Such sales occurred~~AHHSD on October 1, ~~2010 and November 1, 2010, respectively.~~2010.

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

Equity in net earnings of unconsolidated affiliates decreased during the first ~~quarter~~nine months of fiscal 2011 to ~~$0.6~~$1.7 million from ~~$1.5~~$4.0 million for the same period of fiscal 2010. AHHSD contributed ~~$1.0~~$3.2 million of net earnings during the first ~~quarter~~nine months of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings.

Income tax benefit.Income tax benefit was $(5.4) million for the first nine months of fiscal 2011 compared to $(15.8) million for the first nine months of fiscal 2010, which represents an effective tax rate of (80.9%) and (41.6%) for the respective periods. The ~~Company expects continued decreases~~first nine months of fiscal 2011 and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests. The Company has recognized a disproportionate share of losses at certain of our hospitals due to cumulative losses in excess of initial capitalization and committed capital of the Company’s partners or members.

Income (loss) from discontinued operations, net of taxes.Income (loss) from discontinued operations, net of taxes increased to an income of $53.5 million for the first nine months of fiscal 2011 from $1.3 million for the comparable period of fiscal 2010. During the first nine months of fiscal 2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $95.9 million, partially offset by an $11.1 million loss on early termination of debt at one of the facilities. The significant components of the gains recognized are a $25.9 million gain, a $35.7 million gain and a $34.3 million gain on the sale of the assets of Partners/CCH, HHA and TexSan Heart Hospital, respectively. During the first nine months of fiscal 2010, the Company recognized an impairment of $5.2 million to property and equipment at one of its ~~interest~~discontinued hospitals due to declines in ~~Southwest Arizona Heart and Vascular Center, LLC on November 1, 2010.~~operating performance as well as the receipt of an independent third party market offer that indicated that impairment existed. Such impairment was partially offset by the operating activities of another of the Company’s discontinued hospitals. During the first nine months of fiscal 2011, the Company has had nominal operating activities related to its discontinued operations.

Net income attributable to noncontrolling interest.Noncontrolling interest share of earnings of consolidated subsidiaries increased to ~~$11.4~~$16.4 million for the first ~~quarter~~nine months of fiscal 2011 from ~~$0.8~~$5.7 million for the comparable period of fiscal 2010.

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

~~(Loss) income from discontinued operations, net of taxes.~~(Loss) income from discontinued operations, net of taxes increased to income of $26.1 million, net of taxes for the first quarter of fiscal 2011 from a loss of $1.1 million, net of taxes, for the comparable period of fiscal 2010. During the first quarter of fiscal 2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, partially offset by an $11.1 million loss on early termination of debt at 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

Cash provided by continuing operations from operating activities was $3.6 million for the first nine months of fiscal 2011 compared to cash provided by continuing operations operating activities of $15.9 million for the comparable period of fiscal 2010. The decrease of $12.3 million in cash provided by continuing operations from operating activities was ~~$0.5~~due to a $12.5 million ~~for~~decrease in cash from operating activities, an increase in payments of $8.3 million related to the ~~first three months~~timing of ~~fiscal 2011 compared~~payments associated with accounts payable and a decrease in accounts receivable collections of $0.4 million. These increases in cash payments were partially offset by a $1.7 million reduction in cash payments associated with the purchases of and cost of medical supplies and a $6.5 million decrease in payments related to ~~$2.0 million for~~ the ~~comparable period~~timing of ~~fiscal 2010.~~prepaid obligations, such as yearly insurance premiums.

Our investing activities from continuing operations provided net cash of ~~$32.1~~$21.1 million for the first ~~three~~nine months of fiscal 2011 compared to a use of cash of ~~$7.5~~$15.2 million for the comparable period of fiscal 2010. Such increase iswas primarily due to the net proceeds of ~~$31.9~~$24.9 million for the disposition of the Company’s interest in ~~Avera Heart Hospital of South Dakota and Southwest Arizona Heart and Vascular LLC~~AHHSD during the first ~~quarter~~nine months of fiscal 2011. In addition, the Company experienced a decrease of ~~$7.4~~$13.0 million in cash paid for property and equipment in the first ~~quarter~~nine months of fiscal 2011 as compared to the same period in fiscal 2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of ~~Hualapai Mountain Medical Center,~~HMMC, which opened in October 2009. In addition, the Company used cash of $1.8 million to pledge as collateral for certain letters of credit that had not been required to be collateralized due to the Company’s repayment of its Amended Credit Facility during the third quarter of fiscal 2011.

Our financing activities from continuing operations used net cash of ~~$12.9~~$78.3 million for the first ~~three~~nine months of fiscal 2011 compared to ~~$12.3~~$21.2 million for the comparable period of fiscal 2010. ~~Cash used~~The increase was due to ~~repay long-term debt~~the repayment of outstanding amounts and ~~obligations under capital leases increased $2.8 million for~~termination of our Amended Credit Facility during the first ~~three~~nine months of fiscal 2011, ~~as compared to the comparable period~~including repayment of ~~fiscal 2010. This increase was partially offset by a decrease of $2.4 million~~all outstanding amounts in distributions to noncontrolling shareholders. Subsequent to the end of the first quarter of fiscal 2011, the Company made an additional $20.6 million prepayment of its outstanding balance under the Amended Credit Facility.May 2011.

Capital Expenditures.Cash paid for property and equipment was ~~$0.2~~$2.3 million and ~~$7.5~~$15.3 million for the first ~~three~~nine months of fiscal years 2011 and 2010, respectively. Of the ~~$7.5~~$15.3 million of cash paid for property and equipment during the first ~~three~~nine months of fiscal 2010, ~~$3.7~~$7.5 million related to ~~Hualapai Mountain Medical Center,~~HMMC, which opened in October 2009.

Obligations and Availability of Financing.At ~~December 31, 2010,~~June 30, 2011, we had ~~$67.4~~$6.6 million of ~~outstanding long-term debt and~~ obligations under capital leases of which $61.6 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $58.9 million. The remaining outstanding obligation under capital leases of $8.5 million was(which is due to various lenders to our ~~hospitals. No amounts were outstanding under our Revolver. The maximum availability under our Revolver is $59.5~~hospitals), of which $2.3 million ~~which is reduced by outstanding letters of credit totaling $1.7 million~~was classified as ~~of December 31, 2010. As previously noted, on January 5,~~current. At June 30, 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. However, as noted in~~~~Liquidity and Capital Resources~~in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, the Company was not required to test the fixed charge coverage ratio at December 31, 2010 and will retest such compliance at the fiscal quarter ended March 31, 2011 and subsequent fiscal quarters.

~~At December 31, 2010,~~ we guaranteed either all or a portion of the obligations of certain of our subsidiary hospitals for ~~equipment.~~equipment and other notes payable. 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 cash on hand, internally generated cash flows from operations and net proceeds from asset sales will be sufficient to finance our strategic plans, capital expenditures and our working capital requirements for the next 12 to 18 months. ~~Repayment~~

We anticipate distributing approximately $6.75 per common share during the fourth quarter of fiscal 2011 to stockholders as of the ~~outstanding balance under our Amended Credit Facility prior to its November~~record date for such distribution. The distribution will only occur if we obtain shareholder approval of the proposals outlined in a preliminary proxy statement filed on August 5, 2011, ~~maturity date~~and no currently unknown or unanticipated material liabilities of the Company arise. The distribution will be ~~dependent~~made using cash on ~~existing cash, cash flow from operations~~hand 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.~~sale of Heart Hospital of New Mexico and Arkansas Heart Hospital (see note 16).

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~~$116.5 million as of ~~September~~June 30, ~~2010 and December 31, 2010, respectively. All~~2011.

The net realizable value of our intercompany notes ~~are eliminated in consolidation and are not reflected~~outstanding includes a reserve for the amount of the impairment charges we have recorded for facilities that have an intercompany amount outstanding that exceeds the carrying value of the related assets that serve as collateral on the ~~Company’s consolidated balance sheet.~~notes. Therefore, our total net realizable value of our intercompany note outstanding has been reduced by $82.6 million, the total amount of impairment charge recorded for assets in continuing operations.

The estimated net realizable value of intercompany notes related to continuing operations at June 30, 2011 is outlined below:

Estimated Net Realizable Value of Intercompany Notes Related to Continuing
Operations at June 30, 2011


	(in millions)
Heart Hospital of New Mexico and Arkansas Heart Hospital(1)	$	40,377
Bakersfield Heart Hospital		31,678
Hualapai Mountain Medical Center(2)		22,107
Louisiana Medical Center and Heart Hospital(2)		22,348

Continuing Operations	$	116,509


(1)		Heart Hospital of New Mexico and Arkansas Heart Hospital were included in continuing operations at June 30, 2011, but will be classified as discontinued operations for the Company’s fourth quarter ending September 30, 2011. See Note 16.

(2)		The net realizable value of these intercompany notes is directly related to the fair value (and carrying value) of the property, plant and equipment of these entities which serve as collateral for the notes. The carrying value of the property, plant and equipment is net of impairment charges that were incurred related to these assets.

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~~June 30, 2011 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~~June 30, 2011, the Company had ~~$158.5~~$113.7 million in cash related to continuing operations and ~~$45.4~~$43.2 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~~June 30, 2011, 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~~$27.0 to $28.0 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.~~operations such as those that may arise as a result of the pending ICD investigation. 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.~~

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, 2010, as amended, before making an investment decision with respect to our equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://www.medcath.com.


Item 3.		~~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.~~June 30, 2011. There was no material change in our policy for managing risk related to variability in interest rates, commodity prices, other relevant market rates and prices during the first ~~three~~nine months of fiscal 2011. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, as amended, for further discussions about market risk.

Interest Rate Risk

~~Our~~Until the repayment of our Amended Credit Facility in May 2011, borrowings ~~expose~~exposed us to risks caused by fluctuations in the underlying interest rates. ~~The total outstanding balance of our Credit Facility was $58.9 million at December 31, 2010. A change of 100 basis points in~~Subsequent to such date, the ~~underlying interest rate would have caused a change~~Company is no longer exposed to fluctuations in interest ~~expense of approximately $0.1 million during the three month period ended December 31, 2011.~~rates.


Item 4.		~~Item 4.~~ Controls and Procedures

The President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation of the Company’s disclosure controls and procedures as of ~~December 31, 2010,~~June 30, 2011, that the Company’s disclosure controls and procedures were effective as of ~~December 31, 2010~~June 30, 2011 to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported in a timely manner, and includes controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes during the fiscal quarter to the Company’s internal controls over financial reporting that materially affected or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION


Item 1.		~~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.


~~Exhibit No.~~	2.2		~~Description~~

~~2.3~~		Asset Purchase Agreement dated as of ~~November 5, 2010~~May 6, 2011 by and between ~~Methodist Healthcare~~Lovelace Health System, ~~of San Antonio, LTD., L.L.P.~~Inc. and Heart Hospital of ~~San Antonio, LP(2)~~New Mexico, LLC (1)

	3.1		~~Amended and Restated Bylaws~~	Certificate of ~~MedCath Corporation(3)~~Designation of Series A Junior Participating Preferred Stock, filed with the Secretary of State of the State of Delaware on June 15, 2011 (2)

10.1*	4.1		~~Amendment to Employment Agreement~~	Section 382 Rights Plan, dated ~~and effective December 30, 2010 by and~~as of June 15, 2011, between MedCath Corporation and ~~O. Edwin French~~American Stock Transfer & Trust Company, LLC, as Rights Agent, together with the following exhibits thereto: Exhibit A — Form of Certificate of Designation of Series A Junior Participating Preferred Stock of MedCath Corporation; Exhibit B — Form of Right Certificate; Exhibit C — Summary of Rights to Purchase Shares of Preferred Stock of MedCath Corporation (2)

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*	31.1		~~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.~~May 12, 2011.

(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.~~June 16, 2011.

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~~Equity Purchase Agreement dated as of ~~October 29, 2010~~May 6, 2011 by and ~~between St. David’s Healthcare Partnership, L.P.~~among AR-Med, LLC, Little Rock Cardiology Clinic, P.A., MedCath of Little Rock, L.L.C., MedCath of Arkansas, LLC and ~~Heart Hospital IV, L.P.~~MedCath Finance Company, LLC (1)

~~2.3~~	2.2			Asset Purchase Agreement dated as of ~~November 5, 2010~~May 6, 2011 by and between ~~Methodist Healthcare~~Lovelace Health System, ~~of San Antonio, LTD., L.L.P.~~Inc. and Heart Hospital of ~~San Antonio, LP(2)~~New Mexico, LLC (1)

	3.1		~~Amended and Restated Bylaws~~	Certificate of ~~MedCath Corporation(3)~~Designation of Series A Junior Participating Preferred Stock, filed with the Secretary of State of the State of Delaware on June 15, 2011 (2)

10.1*	4.1		~~Amendment to Employment Agreement~~	Section 382 Rights Plan, dated ~~and effective December 30, 2010 by and~~as of June 15, 2011, between MedCath Corporation and ~~O. Edwin French~~American Stock Transfer & Trust Company, LLC, as Rights Agent, together with the following exhibits thereto: Exhibit A — Form of Certificate of Designation of Series A Junior Participating Preferred Stock of MedCath Corporation; Exhibit B — Form of Right Certificate; Exhibit C — Summary of Rights to Purchase Shares of Preferred Stock of MedCath Corporation (2)

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*	31.1		~~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.~~May 12, 2011.

(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.~~June 16, 2011.


	Page

PART I. FINANCIAL INFORMATION		3

Item 1. Unaudited Consolidated Financial Statements		3

Consolidated Balance Sheets as of ~~December 31, 2010~~June 30, 2011 and September 30, 2010		3

Consolidated Statements of Operations for the Three and Nine Months Ended ~~December 31,~~June 30, 2011 and 2010 ~~and 2009~~		4

Consolidated Statement of Stockholders’ Equity for the ~~Three~~Nine Months Ended ~~December 31, 2010~~June 30, 2011		5

Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~December 31,~~June 30, 2011 and 2010 ~~and 2009~~		6

Notes to Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1824

Item 3. Quantitative and Qualitative Disclosures About Market Risk		2635

Item 4. Controls and Procedures		2635

PART II. OTHER INFORMATION		2635

Item 1. Legal Proceedings		2635

Item 1A. Risk Factors		2636

Item 6. Exhibits		2636

SIGNATURES		2837
~~EX-10.1~~
~~EX-10.2~~
~~EX-10.3~~
~~EX-10.4~~
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


	For the Nine Months Ended
	June 30, 2011					June 30, 2010
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		932,137		$	21.89		1,027,387		$	22.25

Cancelled		(149,575	)		22.84		(55,750	)		23.80


Outstanding stock options, end of period		782,562		$	21.70		971,637		$	22.17


	Three Months Ended December 31,
Division	2010			2009
Hospital		97.4	%		96.1	%
MedCath Partners		2.5	%		3.8	%
Corporate and other		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%


							Consolidated						Consolidated
	Three Months Ended December 31,						Three Months Ended June 30,						Nine Months Ended June 30,
Payor	2010			2009			2011			2010			2011			2010
Medicare		50.8	%		53.9	%		50.9	%		51.8	%		51.6	%		52.4	%
Medicaid		4.3	%		3.9	%		4.1	%		6.1	%		4.5	%		5.1	%
Commercial and other, including self-pay		44.9	%		42.2	%		45.0	%		42.1	%		43.9	%		42.5	%

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


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	)


Exhibit No.			Description

2.1	~~Membership Interest~~	Equity Purchase Agreement ~~effective~~dated as of ~~November 1, 2010~~May 6, 2011 by and among ~~Southwest Arizona Heart and Vascular Center,~~AR-Med, LLC, Little Rock Cardiology Clinic, P.A., MedCath of Little Rock, L.L.C., MedCath of Arkansas, LLC and MedCath ~~Partners, LLC(1)~~Finance Company, 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)~~


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


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


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