~~MEDCATH CORPORATION~~
~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(All tables in thousands, except percentages and per share data)~~
Basis of Presentation— The Company’s unaudited interim consolidated financial statements as of December 31, ~~2010~~2011 and September 30, 2011 and for the three ~~months~~month periods ended December 31, ~~2010~~2011 and ~~2009~~2010 have been prepared in accordance with accounting principles generally accepted in the United States of America hereafter, (“generally accepted accounting principles”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited interim consolidated financial statements reflect, in the opinion of management, all material adjustments necessary to fairly ~~state~~present the Company’s assets in liquidation, its changes in net assets in liquidation, and 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.~~2011. During the three months ended December 31, ~~2010,~~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.~~

2011.
Segment Reporting - Operating segments are components of an enterprise about which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. Two or more operating segments may be aggregated into a single reportable segment if the segments have similar economic and overall industry characteristics, such as customer class, products and service. The Company’s chief operating decision maker, its Chief Executive Officer, evaluates performance and makes operating decisions about allocating resources based on financial data presented on a consolidated basis. Through March 31, 2011, the Company’s reportable segments consisted of the Hospital Division and the MedCath Partners Division. However, during the third quarter of fiscal 2011, the Company disposed of its interest in the Partners Division. Accordingly, the Company’s sole reporting segment is the Hospital Division.
MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
2. Plan of Dissolution and Liquidation Basis of Accounting
Plan of Dissolution— The Company’s Plan of Dissolution provides for the completion of the voluntary liquidation, winding up and dissolution of the Company. As a result of the stockholders approval of the Plan of Dissolution, the Company will seek to (i) sell its remaining assets, (ii) pay, or establish a reserve to pay, all of the Company’s liabilities, including without limitation (a) any liabilities arising out of the United States Department of Justice (“DOJ”) inplantable cardioverter defibrillator (“ICD”) Investigation (see Note 6), (b) other currently unknown or unanticipated liabilities, and (c) a reserve of such additional amount as the Company’s Board of Directors determines to be necessary or appropriate under the General Corporation Law of the State of Delaware (“DGCL”) with respect to additional liabilities that may arise after the Company files for dissolution, and (iii) make one or more additional liquidating distributions. Thereafter, the Company will file a certificate of dissolution in accordance with Section 275 of the DGCL (the “Filing”) in order to dissolve and will attempt to liquidate any of its remaining unsold assets, satisfy or make reasonable provisions for the satisfaction of its remaining obligations, and make distributions to stockholders of any available liquidation proceeds, as well as any remaining cash on hand. Although not currently contemplated by the Company’s Board of Directors, if at any time prior to the Filing the Company’s Board of Directors determines that the Plan of Dissolution is not in the best interests of its stockholders, the Board of Directors may direct that the Plan of Dissolution be abandoned, or may amend or modify the Plan of Dissolution, to the extent permitted by the DGCL, without further stockholder approval. After the Filing, the Board of Directors may seek stockholder approval for the revocation of the Dissolution if it determines that the Plan of Dissolution is no longer in the best interests of the Company and its stockholders.
2.Liquidation Basis of Accounting
Basis of Consolidation — As a result of the Company’s Board approving the Plan of Dissolution and the stockholders’ approval of the Plan of Dissolution, the Company adopted the liquidation basis of accounting effective September 22, 2011. This basis of accounting is considered appropriate when liquidation of a company is imminent. Under this basis of accounting, assets are valued at their net realizable values and liabilities are stated at their estimated settlement amounts.
Use of Estimates— The conditions required to adopt the liquidation basis of accounting were met on September 22, 2011 (the “Effective Date”). The conversion from the going concern to liquidation basis of accounting required management to make significant estimates and judgments.
Accrued Cost of Liquidation
The Company accrued the estimated costs expected to be incurred during the dissolution period. The dissolution period provides time for the Company to sell its remaining assets and file articles of dissolution. Under DGCL, the dissolution period after the filing of the articles of dissolution must be a minimum of three years. In determining its total estimated costs to liquidate, the Company estimated that it will incur costs through September 30, 2015. The estimates were based on prior history, known future events, contractual obligations and the estimated time to complete the liquidation. The Company has recorded total accrued liabilities of $35.8 million, excluding obligations under capital leases, on the statement of net assets as of December 31, 2011. The $35.8 million is the total expected payments for the settlement of liabilities. The $35.8 million includes $23.7 million in accrued liabilities related to the Company’s corporate division and $12.1 million related to the Company’s previously sold entities and for Bakersfield Heart Hospital. Total accrued liabilities do not include any amount related to the DOJ ICD investigation since the Company is unable to reasonably estimate the amounts that could have to be repaid, if any, upon resolution of the investigation. Activities relative to liquidation accruals related to the Company’s corporate division for the three months ended December 31, 2011 are as follows (in millions):
      September 30,
2011    Cash
Payments Adjustments
to Accruals December 31,
2011
Salaries, wages and benefits
   $ 11.2       $ (5.7 ) $ (0.8 ) $ 4.7
Outsourcing information technology and central business office functions
   1.6       (0.8 ) 1.5    2.3
Contract breakage costs
   2.8       —      —      2.8
Insurance
   5.4       (2.1 ) (0.3 ) 3.0
Legal, Board and other professional fees
   11.6       (3.0 ) 0.4    9.0
Office and storage expense
   1.8       (0.1 ) (0.3 ) 1.4
Lease expense
   0.7       (0.2 ) —      0.5




Total liquidation accruals
   $ 35.1       $ (11.9 ) $ 0.5    $ 23.7




MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
Net Assets and Liabilities in Liquidation
In connection with the Company’s stockholders’ approval of the Plan of Dissolution, the Board of Directors declared a liquidating distribution of $6.85 per share of common stock outstanding on September 22, 2011, which was paid October 13, 2011 to stockholders of record on October 6, 2011. This was the first liquidating distribution declared under the Plan of Dissolution and aggregated $139.4 million resulting in a corresponding reduction of dividends payable.
The disposition of the Company’s 34.82% minority ownership interest in Harlingen Medical Center (“HMC”) in Harlingen, Texas, and its 36.06% ownership interest in HMC Realty, LLC, a real estate venture in Harlingen, Texas, which held the real estate related to Harlingen Medical Center, for total consideration of $9.0 million to Prime Health Services. The transaction was completed on November 30, 2011 and resulted in a reduction of $8.5 million to investment in affiliates. In addition, the Company paid approximately $0.5 million of closing costs related to such disposition.

3. 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 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~~did not have any impact on ~~our~~the Company’s 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 isdid not ~~expected to~~ have any impact on the Company’s previously reported results of operations. However, the following additional disclosures outline the Company’s policy on provision of charity care and the aggregate direct and indirect costs of providing such care for the three months ended December 31, 2010:

The Company provides care to patients who meet certain criteria under our charity care policy without charge or at amounts less than the Company’s established rates. Patients that receive charity care discounts must provide a complete and accurate application, be in need of non-elective care and meet certain federal poverty guidelines established by the U.S. Department of Health and Human Services. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as net revenue. The aggregate direct and indirect cost of provision of such care based on the assigned diagnosis-related group to such patients aggregated $0.4 million for the three months ended December 31, 2010.

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. The Company is evaluating the potential impacts the adoption of this ASU will have on its consolidated financial ~~position or~~statements.

MEDCATH CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

4. Discontinued Operations

The results of ~~operations.~~

3.operations for the three month period from October 1, 2010 to December 31, 2010 include the continuing and discontinued operations of the Company. Discontinued ~~Operations~~

~~As required~~operations are not presented separately under ~~accounting principles generally accepted~~the liquidation basis of accounting. However, on September 30, 2011, the Company completed the sale of Hualapai Mountain Medical Center (“HMMC”) in Kingman, Arizona, to Kingman Regional Medical Center and the sale of the Company’s interest in Louisiana Medical Center & Heart Hospital (“LMCHH”) to Cardiovascular Care Group (“CCG”). MedCath financed CCG’s purchase with a secured promissory note that was initially scheduled to mature 60 days after closing, subject to extension at CCG’s election for up to 60 additional days. CCG paid the amount due under that promissory note on January 9, 2012. The total amount paid to MedCath was $22.1 million, which reflected accrued interest and adjustments for final net working capital. These two sales were completed subsequent to the adoption of the Plan of Dissolution, as approved by the Company’s stockholders on September 22, 2011, and therefore are not presented as discontinued operations in the ~~United States (“GAAP”),~~accompanying statement of operations for the three month period ended December 31, 2010.

Prior to its adoption of the liquidation basis of accounting on September 22, 2011, the Company sold its interests in certain businesses and reported the results of operations of those businesses as discontinued operations in its previously issued financial statements for the fiscal year ended September 30, 2011. As a result, the Company has ~~classified~~reclassified the results of operations of the following entities within income from discontinued operations, net of taxes in the accompanying statement of operations for the three month period ended December 31, 2010. The net realizable value of the assets and settlement amount of liabilities on the statement of net assets in liquidation includes the assets and liabilities of ~~these entities~~all continuing and discontinued operations.

Effective August 1, 2011, the Company sold its ownership interest and management rights in Arkansas Heart Hospital (“AHH”) to AR-MED, LLC, which is majority owned by Dr. Bruce Murphy, a physician affiliated with Little Rock Cardiology Clinic, P.A., and an existing investor in AHH. The transaction valued AHH at $73.0 million plus a percentage of the hospital’s available cash. The purchaser and Dr. Murphy have ~~been classified within current~~agreed to indemnify MedCath for liabilities arising from the pre-closing operations of the hospital, including not limited any liabilities that may arise from the pending ICD investigation (see Note 6).

Effective August 1, 2011, the Company sold the majority of the assets of Heart Hospital of New Mexico (“HHNM”) to Lovelace Health System, Inc., which is an affiliate of Ardent Health Services, based in Nashville, Tennessee. The transaction valued the assets at $119.0 million. The limited liability company that owned HHNM, of which 74.8% is owned by MedCath, retained its net working capital. In order to obtain the required approval of HHNM’s physician partners to the sale of HHNM, MedCath paid $22.0 million of the Company’s net proceeds from the sale to such physician partners. Such payment was allocated as an additional noncontrolling interest.

Effective May 4, 2011 the Company sold the majority of the assets of its seven cardiac diagnostic and ~~non-current~~therapeutic facilities (which are referred to as the 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 retained working capital related to the assets sold and also retained assets related to catheterization labs leased to two health care systems outside of North Carolina. Further, MedCath retained certain assets and ~~current~~liabilities arising from this business that arose before closing. The transaction was completed effective May 4, 2011.

As the sale of the MedCath Partners division met the criteria for classification as a discontinued operation, the previously reported gains and ~~long-term liabilities~~losses on sale of its equity interests have also been reclassified to discontinued ~~operations on~~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.

On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New Jersey Heart Services, LLC for $0.6 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 ~~consolidated balance sheets.~~fourth quarter of fiscal 2010 to record the Company’s investment in such business at its net realizable value expected from the sale proceeds.

MEDCATH CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

During November 2010, the Company entered into an agreement to sell substantially all of the assets of TexSan Heart Hospital (San Antonio, Texas) (“TexSan”) to Methodist Healthcare System of San Antonio for $76.25 million, plus ~~an adjustment for~~ retained working capital. The transaction closed on December 31, 2010 with the Company retaining all accounts receivable and the hospital’s remaining liabilities. In addition, the Company acquired the partnership’s minority investors’ ownership in accordance with the terms of a call option agreement. See Note 76 for further discussion. The gain ~~from this sale~~ of ~~$34.3~~$32.4 million has been included in income ~~(loss)~~ from discontinued operations for the three months ended December 31, 2010.

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

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

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

During August 2010, the Company entered into a definitive agreement to sell certain of the hospital assets and liabilities, plus certain net working capital of ~~AzHH~~Arizona Heart Hospital (Phoenix, Arizona) (“AzHH”) to Vanguard Health Systems 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 months ended December 31, 2010.

During February 2010, the Company entered into an agreement to sell substantially all of the assets of ~~HHA~~Heart Hospital of Austin (Texas) (“HHA”) to St. David’s Healthcare Partnership L.P. 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.~~capital. The transaction closed on November 1, 2010.

~~During May 2008,~~ The gain of $35.7 million has been included in income from discontinued operations for 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~~three months ended December 31, 2010 and September 30, 2010, the Company had reserved $10.0 million and $9.8 million, respectively, for Medicare outlier payments received by DHH during the year ended September 30, 2004, which are included in current liabilities of discontinued operations in the consolidated balance sheets.

2010.

The Company has entered into transition services agreements with the buyers of certain of its sold assets that extend into fiscal ~~2011.~~2012. As a result, the Company entered into a ~~Managed Services Agreement~~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 the Company’s 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~~statement 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 December 31, 2010
Net revenue	$	72,063
Gain from dispositions, net		69,903
Loss on early termination of debt		(11,130	)
Income before income taxes		65,773
Income tax expense		20,976

Net income		44,797
Less: Net income attributable to noncontrolling interest		(11,228	)

Net income attributable to MedCath Corporation	$	33,569

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

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

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

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

~~4. Accounts Receivable~~

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

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

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

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

5. Investments in Affiliates

The Company’s determination of the appropriate consolidation method to follow with respect to investments in affiliates is based on the amount of control the Company has and the ownership level in the underlying entity. Investments in entities that the Company does not control, but over whose operations the Company has the ability to exercise significant influence (including investments where the Company has a less than 20% ownership) are accounted for under the equity method. The Company additionally considers if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations the Company does not control. At December 31, ~~2010,~~2011, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. AtAs of December 31, ~~2010,~~2011, the Company’s net realizable value in a partnership that owns a medical office building located in Austin, Texas represents the Company’s sole remaining unconsolidated affiliate.

MEDCATH CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

On November 30, 2011, the Company ~~owns~~entered into a ~~noncontrolling~~definitive agreement and simultaneously sold its ownership interest in Harlingen Medical Center and ~~certain diagnostic ventures~~HMC Realty, LLC to Prime Healthcare Services (“Prime”). The transaction valued the Company’s combined ownership interest in Harlingen Medical Center and ~~partnerships, for which~~HMC Realty, LLC at $9.0 million. Anticipated net proceeds to the Company ~~neither has substantive control over~~from the ~~ventures nor is~~sale, along with the ~~primary beneficiary. These investments are included~~recapture of prior losses attributable to the operation of Harlingen Medical Center, resulted in ~~Other Assets~~a tax gain on the ~~consolidated balance sheets.~~

transaction of $20.4 million. As a result of the tax gain, the net after-tax proceeds from the transaction were $0.3 million. The Company had previously adjusted its investments in Harlingen Medical Center and HMC Realty, LLC to their net realizable value and had adjusted it deferred income taxes based on this gain. Accordingly, no adjustment to the net assets in liquidation was required for this transaction during the three months ended December 31, 2011.

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

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

The 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 for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which includes a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit (of which $1.7 million were outstanding as of December 31, 2010 and September 30, 2010) and a $10.0 million sub-limit for swing-line loans. At the request of the Company and approval from its lenders, the aggregate amount available under the Amended Credit Facility may be increased by an amount up to $50.0 million. Borrowings under the Amended Credit Facility, excluding swing-line loans, bear interest per annum at a rate equal to the sum of LIBOR plus 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.

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

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

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

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

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

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

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

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

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

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

7. Contingencies and Commitments

Put and Call Options— During August 2010, the Company ~~entered into a put/call~~amended its partnership agreement with ~~the minority shareholders~~ one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put allowed the Company’s noncontrolling ~~shareholders~~stockholders in the hospital to put their shares to the Company for the net amount of the physician investors’ unreturned capital contributions.

The noncontrolling ~~shareholders’~~stockholders’ 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.interest. Furthermore, upon exercise, the Company converted the outstanding balance of the noncontrolling interest in this partnership together with amounts due from the noncontrolling ~~shareholders~~stockholders into a net obligation, of ~~$5.7~~which $3.0 million ~~which is included in other accrued liabilities~~remains outstanding as of December 31, ~~2010.~~

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

2011.

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

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 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.~~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.~~

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 settlement agreements during the second quarter of fiscal 2009 with the DOJ whereby the Company was expected to pay $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.

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

In September 2010, the Company received a letter from the DOJ advising it that an investigation is being conducted to determine whether certain of the 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. The Company’s total ICD net revenue is a material component of total net patient revenue and this investigation could have a material adverse effect on the Company’s financial condition and results of operations.

liquidation.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

On March 12, 2010, the DOJ issued a Civil Investigative Demand (“CID”) to one of the Company’s hospitals regarding ICD implantations (the “ICD Investigation”). The CID was issued in connection with an ongoing, national investigation relating to ICDs and Medicare coverage requirements for these devices. The CID requested certain documents and patient medical records regarding the implantation of 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, the DOJ sent a letter notifying the Company of the DOJ’s investigation of eight Company hospitals regarding ICD implantations. In its letter, the 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 the 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, the DOJ provided the Company a spreadsheet detailing instances (based upon the 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 the DOJ is “raw,” and the Company understands that, as of this date, such data had not been analyzed by the DOJ. Additionally, the 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 the DOJ to discuss the agency’s review of the patient medical records provided in response to the CID. In addition to discussing the 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.

During the period March 2011 through December 2011, legal counsel for the Company has met on multiple occasions with representatives of the DOJ to discuss the investigation and present preliminary findings regarding an internal review of a Company hospital other than the hospital subject to the CID. These preliminary findings were submitted to the DOJ 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 requests from the DOJ for information, is actively engaged in discussions with the DOJ regarding the issues involved in the ICD Investigation, and continues to review the ICD implantations under investigation. Pursuant to the DOJ’s requests, the Company has entered into tolling agreements that tolled the statute of limitations for allegations related to ICDs until October 31, 2012. To date, the 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 the investigations and is unable to reasonably estimate the amounts to be repaid, which may be material upon resolution of the investigations. However, the Company understands that this investigation is being conducted under the False Claims Act which could expose the Company to treble damages should the DOJ’s preliminary analysis of the Company’s hospitals’ ICD claims be substantiated. The Company’s total ICD net revenue historically has been a material component of total net patient revenue and the results of this investigation could have a material effect on the Company’s net assets in liquidation and the amount it will be able to distribute to its stockholders in connection with its planned liquidation and dissolution.

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.

MEDCATH CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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~~2011 and ~~2009,~~2010, 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~~$0.3 million 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~~2011 and September 30, ~~2010,~~2011, 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~~$1.2 million and $0.6 million, respectively, which is included in other accrued liabilities in the consolidated ~~balance sheets.~~statements of net assets. The Company maintains this reserve based on actuarial estimates using the Company’s historical experience with claims and assumptions about future events.

In addition to reserves for medical malpractice, the Company also maintains reserves for self-insured workman’s compensation, healthcare and dental coverage. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$3.0~~$0.4 million and ~~$3.3~~$1.0 million as of December 31, ~~2010~~2011 and September 30, ~~2010,~~2011, respectively, which is included in other accrued liabilities in the consolidated ~~balance sheets.~~statements of net assets. The Company maintains this reserve based on historical experience with claims. The Company maintains commercial stop loss coverage for health and dental insurance program of ~~$175,000~~$0.2 million 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, the maximum potential future payments that the Company could be required to make under these guarantees was $25.9 million through June 2013. At December 31, 2010 the Company had total liabilities of $9.8 million for the fair value of these guarantees, of which $6.6 million is in other accrued liabilities and $3.2 million is in other long term obligations. Additionally, the Company had assets of $10.2 million representing the future services to be provided by the physicians, of which $6.5 million is in prepaid expenses and other current assets and $3.7 million is in other assets.

7. Per Share Data

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

Diluted— The calculation of diluted earnings per share considers the potential dilutive effect of options to purchase 913,812 ~~and 986,637~~ shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at December 31, 2010 ~~and 2009, respectively,~~ as well as 309,405 ~~and 782,707~~ shares of restricted stock which were outstanding at December 31, ~~2010 and 2009, respectively.~~2010. 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~~the 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)~~

9.8. 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 months ended December 31, 2010 ~~and 2009~~ was $1.9 ~~million and $0.6 million, respectively.~~million. The associated tax benefits related to the compensation expense recognized for the three months ended December 31, 2010 ~~and 2009~~ was $0.8 ~~million and $0.2 million, respectively.~~

~~Stock Options~~

~~The following table summarizes~~million. During the ~~Company’s~~three months ended December 31, 2010, 18,325 stock ~~option activity:~~

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

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

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

options were cancelled.

Restricted Stock Awards

There were no grants of restricted stock during the three months ended December 31, 2010. All restricted stock granted became fully vested on September 30, 2011. During the three months ended December 31, 2009, the Company granted to employees 369,164 shares of restricted stock. Restricted stock granted to employees, excluding executives of the Company, vest annually on December 31 over a three year period. Executives of the Company defined by the Company as vice president or higher, received two equal grants of restricted stock. The first grant vests annually in December of each year over a three year period. The second grant vests annually in December of each year, over a three year period if certain performance conditions are met. All unvested2010, 423,980 restricted stock awards and units previously granted became vested.

9. Subsequent Events

MedCath received a secured promissory note from CCG for its purchase of LMCHH that was 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~~mature on January 31, ~~2010 the Company had $1.8 million of unrecognized compensation expense associated with restricted stock awards~~.

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

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

Granted — — 369,164 6.99
Vested (423,980 ) 9.42 (90,195 ) 9.30
Cancelled — — (10,026 ) 9.03

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

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

~~10. Reportable Segment Information~~

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

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

Three Months Ended December 31,
2010 2009

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

Consolidated totals $ 88,900 $ 87,830

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

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

December 31, September 30,
2010 2010
Aggregate identifiable assets:
Hospital Division $ 296,226 $ 414,656
MedCath Partners Division 11,401 20,210
Corporate and other 174,118 59,672

Consolidated totals $ 481,745 $ 494,538

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

~~11. Business Ownership Changes~~

~~Change in Ownership Due to Cancellation of Stock Subscription Receivable —~~~~Upon the formation of Hualapai Mountain Medical Center the minority owners entered into stock subscription agreements whereby they~~2012. CCG paid ~~for their ownership in two installments. At the date of formation,~~ the amount due ~~from the minority owners~~under that promissory note on January 9, 2012. The total amount paid to MedCath was ~~recorded as a stock subscription receivable. During the fourth quarter of fiscal 2010, several minority owners did not submit the~~approximately $22.1 million, which reflected accrued interest and adjustments for final installment. As a result, and per the partnership operating agreement, the proportionate ownership was transferred to the Company and the stock subscription receivable was reduced accordingly. As a result, the Company’s ownership in HMMC increased from 79.00% to 82.49%.

~~12. Property and Equipment~~

December 31, September 30,
2010 2010

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

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

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

net working capital.

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

~~13. 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 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability, such as internal estimates of discounted cash flows or third party appraisals.

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

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

~~14. Subsequent Events~~

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

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

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

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

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the interim unaudited consolidated financial statements and related notes included elsewhere in this report, as well as the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report onForm 10-K for the fiscal year ended September 30, ~~2010.~~2011.

Overview

~~General~~. and Background of Strategic Options Process

We are a healthcare provider that owned and operated hospitals that are 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, we currently own 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: 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.

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

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

On March 1, 2010 we announced that our Board of Directors had formed a Strategic Options Committee to consider the sale either of ~~the Company~~our equity or the sale of our individual hospitals and other ~~assets.~~assets as the Board of Directors determined that selling our assets or equity may provide the highest return for our stockholders. We retained Navigant Capital Advisors as our financial advisor to assist in this process. At that time we had majority ownership interests in eight hospitals, minority ownership interests in two hospitals, a minority ownership interest in a hospital real estate venture, and owned MedCath Partners, a division of MedCath that managed cardiac diagnostic and therapeutic facilities. Since ~~announcing the exploration of strategic alternatives on March 1, 2010,~~this announcement, we have ~~completed several transactions, including:~~

	•		The disposition of Arizona Heart Hospital (Phoenix, AZ) in which we sold the majority of the hospital’s assets to Vanguard Health Systems for $32.0 million, plus retained working capital. The transaction was completed effective October 1, 2010. We anticipate that we will receive final net proceeds of approximately $31.5 million from the transaction after payment of retained known liabilities, payment of taxes related to the transaction and collection of the hospital’s accounts receivable. The $31.5 million in estimated net proceeds is prior to any reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		~~The disposition~~sold seven of our majority owned hospitals, our equity interest in the two minority owned hospitals, our equity interest in the hospital real estate venture and our MedCath Partners division, including a venture that was minority owned through our MedCath Partners division. Accordingly, as of December 31, 2011, we had a 53.3% ownership interest in Bakersfield Heart Hospital in Bakersfield, California. We manage our remaining hospital from our corporate office located in Charlotte, North Carolina. On September 22, 2011, at a special meeting of stockholders and following the recommendation of the Board of Directors, our stockholders approved (a) the sale of all or substantially all of our remaining assets prior to filing a certificate of dissolution and the complete liquidation of the Company (as described in Section 356(a) of the Internal Revenue Code of 1986, as amended, and (b) the dissolution of the Company under the Delaware General Corporation Law (“Plan of Liquidation”). Accordingly, we adopted the liquidation basis of accounting as of September 22, 2011 since the liquidation and dissolution of the Company was considered imminent. As a result of the adoption of a formal Plan of Dissolution, our activities are now limited to operating Bakersfield Heart Hospital, fulfilling transition service obligations to the purchaser of our hospitals, realizing the value of our remaining assets; making tax and regulatory filings; winding down our remaining business activities and making distributions to our stockholders. Winding down our remaining business activities includes continuing our corporate division functions, managing our remaining hospital, Bakersfield Heart Hospital, until its value is realized through a sale transaction, realizing the value of corporate held assets and paying the creditors of previously sold hospitals in which we retained net working capital. Management’s goal is to liquidate all of the Company’s remaining assets as soon as practical while seeking to maximize stockholder value. We currently anticipate that all of the remaining operating assets of the Company will be sold in calendar 2012, and that an additional liquidating distribution will be paid before the Company files a certificate of dissolution, subject to the Company’s obligation to pay or make provisions to satisfy all of its expenses and liabilities. After the sale of its operating assets, the Company intends to retain an amount of assets that are needed to ensure that it has sufficient assets to pay or satisfy all of its remaining expenses and liabilities. Payroll and related costs and other expenses are currently anticipated to be incurred at least through September 30, 2015 in order to complete all required regulatory filings and audits. Accordingly, our estimate of expenses anticipated to be incurred during the period from January 1, 2012 to September 30, 2015 have been accrued as of December 31, 2011 in our financial statements prepared on the liquidation basis of accounting. Such estimate does not include any estimate of liabilities arising from the ICD Investigation or other unknown or anticipated liabilities. The Company may transfer all of its assets to a liquidating trust prior to September 30, 2015 and may make additional liquidating distributions prior to September 30, 2015. Since the announcement of the Strategic Options Committee and commencement of our strategic options process, the Company has completed the following transactions: The disposition of Arizona Heart Hospital 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. We estimate that we will receive final net proceeds from the transaction of approximately $16.0 million, after payment of estimated taxes related to the transaction and prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of Heart Hospital of Austin (Texas) in which we and our physician owners sold substantially all of the hospital’s assets to St. David’s Healthcare Partnership L.P. for approximately $83.8 million, plus retained working capital. The transaction was completed effective November 1, 2010. We anticipate that we will receive final net proceeds of approximately $24.1 million from the transaction after repayment of third party debt and a related prepayment fee, payment of all known retained liabilities of the partnership, payment of taxes related to the transaction, collection of the partnerships accounts receivable, and distributions to the hospital’s minority partners. The $24.1 million in estimated net proceeds is prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of our approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC (Yuma, AZ) to the joint venture’s physician partners for $7.0 million. The transaction was completed effective November 1, 2010. We estimate that final net proceeds from the transaction will total approximately $6.9 million, after closing costs and income tax benefit related to a tax loss on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

	•		The disposition of TexSan Heart Hospital (San Antonio, Texas) in which we and our physician owners sold substantially all of the hospital’s assets to Methodist Healthcare System of San Antonio for $76.25 million, plus retained working capital. The transaction was completed on December 31, 2010. We estimate that final net proceeds from the transaction will total approximately $60.8 million, after closing costs and income taxes on the transaction, but prior to reserves, if any, required in management’s judgment to address any potential contingent liabilities.

We cannot assure our investors that our continuing efforts to enhance stockholder value will be successful, or whether future transactions will involve a sale of the Company, a sale of our individual hospitals or other assets, or a combination of these alternatives. We continue to consider all practicable alternatives to maximize stockholder value. Although the strategic options process is on-going and expected to continue throughout fiscal 2011 and potentially beyond, we have begun to consider a number of scenarios for distributing available cash to our stockholders, such as special cash dividends and/or distributions to stockholders following future sales of individual hospitals or other assets or in the context of a dissolution, and following repayment of all bank debt and termination of our credit facility. If our common equity is sold in a merger or other similar transaction, then stockholders would receive consideration in exchange for their shares in accordance with the terms of that transaction.

Many unknown variables, including those related to seeking any approvals which may be required, will affect the amount, timing and mechanics of any potential distributions to stockholders. Until further progress is made in the strategic options process, we are unable to determine the approach that best meets the interests of our stockholders. Final amounts available to stockholders will be diminished by asset and corporate wind-down related operating and other expenses, continued debt service obligations, tax treatment, inability to collect all amounts owed and any required reserves to address liabilities, including retained and contingent liabilities and/or other unforeseen events.

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

Three Months Ended December 31,
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 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. The following table sets forth the percentage of consolidated net revenue we earned by category of admitting payor in the periods indicated.

Three Months Ended December 31,
Payor 2010 2009
Medicare 50.8 % 53.9 %
Medicaid 4.3 % 3.9 %
Commercial and other, including self-pay 44.9 % 42.2 %

Total consolidated net revenue 100.0 % 100.0 %

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

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, administrative rulings, court decisions, audits, investigations, executive orders and freezes and funding reductions, all of which may significantly affect our business. In addition, reimbursement is generally subject to adjustment and possible recoupment following audit by all third party payors, including commercial payors and the contractors who administer the Medicare program for the Center for Medicare and Medicaid Services (“CMS’) as well as the Office of Inspector General. Final determination of amounts due providers under the Medicare program often takes several years because of such audits, as well as resulting provider appeals and the application of technical reimbursement provisions. We believe that adequate provision has been made for any adjustments that might result from these programs; however, due to the complexity of laws and regulations governing the Medicare and Medicaid programs, the manner in which they are interpreted and the other complexities involved in estimating our net revenue, there is a possibility that recorded estimates will change by a material amount in the future.

~~Results of Operations~~

~~Three Months Ended December 31, 2010 Compared to Three Months Ended December 31, 2009~~

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

Three Months Ended 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 December 31,
2010 2009 % Change

Selected Operating Data (a):

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


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

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

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

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

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

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

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

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

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

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

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

~~Net Revenue.~~Our consolidated net revenue increased 1.2% or $1.1 million to $88.9 million for the first quarter of fiscal 2011 from $87.8 million for the first quarter of fiscal 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% of the Hospital Division’s net patient revenue for the first quarter of fiscal 2011 compared to 71% for the first quarter of fiscal 2010. Our total inpatient net revenue and cases decreased 3.4% and 2.0%, respectively during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010, whereas outpatient net revenue and cases increased 9.3% and 31.5%, respectively during the same period.

The decrease in inpatient net revenue is due to a 6.5% decline in our core cardiovascular cases offset by an 8.0% increase in our non-cardiovascular cases. Hualapai Mountain Medical Center, (“HMMC”), our newest hospital which began operations during the first quarter of fiscal 2010, is a general acute care facility so it contributed to the increase in our non-cardiovascular procedures for the first quarter of fiscal 2011 compared to the same period of 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 of fiscal 2011 included charity care deductions of $2.1 million compared to charity care deductions of $1.9 million for the first quarter of fiscal 2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

~~Personnel expense.~~~~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 increase in stock based compensation expense. As part of the strategic options process, the compensation committee of our Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock shares during the first quarter of fiscal 2011 to ensure the deductibility of the compensation expense for federal corporate income tax purposes. The waiver caused all future stock based compensation expense related to the shares that would have vested over time as performance criteria were met to be recognized during the first quarter of fiscal 2011. The shares subject to the waiver of vesting criteria contain transfer restrictions that will remain in place until a change in control of the Company. In addition, management updated the estimate on the restricted share forfeiture rate since it is anticipated that the rate of employee turnover will decline as we continue to progress with our strategic options process. We experienced a $0.5 million increase in expense related to hospital employee healthcare claims. This expense is directly attributed to the number of claims reported during the period. These increases were offset by a $0.9 million decline in salaries and wages and related benefits as we continue to monitor costs to better align these costs with net revenues and as the result of a reduction in management positions within hospital division as we sell our hospital assets.

~~Medical supplies expense.~~Medical supplies expense decreased 13.1%, or $2.9 million, to $19.2 million for the first quarter of fiscal 2011 from $22.1 million for the first quarter of fiscal 2010. This decline is due to $2.9 million in sales tax refunds at two of our hospitals. Absent the refunds, medical supplies expense was flat year over year. Medical supplies expense increased $0.7 million at HMMC which began operations in the second month of the first quarter of fiscal 2010 resulting in higher supply expense for the first quarter of fiscal 2011. This increase was offset by a decline in ICD expense as the result of a 7.6% decline in ICD procedures for the first quarter of fiscal 2011 compared to the same period of the prior year.

~~Bad debt expense.~~Bad debt expense increased 29.3%, or $2.2 million, to $9.7 million for the first quarter of fiscal 2011 from $7.5 million for the first quarter of fiscal 2010. As a percentage of net revenue, bad debt expense increased to 10.9% for the first quarter of fiscal 2011 as compared to 8.5% for the comparable period of fiscal 2010. This increase is due to a 68.8%, or $3.2 million, increase in self-pay net revenue for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. We reserve for the estimated bad debt 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 increase related to the consulting fees was offset by declines in non-clinical services as we control costs to better align with our net revenues.

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

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

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

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

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

Our relocation, recruiting and travel expense declined $0.4 million during the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 due to our strategic options process. We hired several key executives during the first quarter of fiscal 2010, which contributed to a higher expense in the prior year compared to the first quarter of fiscal 2011. In addition, we have 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 revenues related to the primary care practice.

Salaries and wage expense declined $0.6 million for the first quarter of fiscal 2011 compared to the first quarter of fiscal 2011 due to our strategic options process. We recognized approximately $1.0 million in 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 million to $4.9 million for the first quarter of fiscal 2011 from $5.9 million for the first quarter of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.

~~Interest expense.~~Interest expense increased $0.2 million to $1.1 million for the first quarter of fiscal 2011 from $0.9 million for the first quarter of fiscal 2010. The increase in interest expense is attributable to a slight increase in the rate charged on outstanding debt and an increase in the amount of assets under capital leases.

~~Gain on sale of equity interests.~~~~The gain on sale of equity interests of $15.4 million for the first quarter of fiscal 2011 is related to the sale of our interest in~~ Avera Heart Hospital of South Dakota ~~(“AHHSD”) partially offset by~~(Sioux Falls, SD) to Avera McKennan for $20.0 million, plus a ~~nominal loss on the sale~~percentage of the hospital’s available cash. The transaction was completed October 1, 2010.

The disposition of Heart Hospital of Austin 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 Heart Hospital 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 ~~LLC. Such sales occurred~~for $5.0 million. The transaction was completed in May 2011.

The disposition of the Company’s 70.3% of ownership interest and management rights in Arkansas Heart Hospital to AR-MED, LLC, for $73.0 million plus a percentage of the hospital’s available cash. The transaction was completed on July 31, 2011.

The disposition of Heart Hospital of New Mexico in which the Company sold the majority of the hospitals assets to Lovelace Health System, Inc. for $119.0 million. The transaction was completed on July 31, 2011.

Subsequent to our adoption of the Plan of Dissolution on September 22, 2011, we have completed three transactions including:

The disposition of the Company’s 95.4% ownership interest in Louisiana Medical Center and Heart Hospital (“LMCHH”) to Cardiovascular Care Group for $23.0 million on September 30, 2011, subject to certain working capital adjustments. A promissory note was received as consideration in connection with the sale. On January 9, 2012 such note was paid in full after immaterial adjustments for final net working capital were made.

The disposition of Hualapai Mountain Medical Center in which the Company sold the majority of the hospitals assets to Kingman Regional Medical Center for $31.0 million plus retention of working capital. The transaction was completed on September 30, 2011.

The disposition of the Company’s 34.82% minority ownership interest in Harlingen Medical Center in Harlingen, Texas, and its 36.06% ownership interest in HMC Realty, LLC, a real estate venture in Harlingen, Texas, which holds the real estate related to Harlingen Medical Center, for total consideration of $9.0 million to Prime Health Services. The transaction was completed on November 30, 2011.

In connection with our stockholders’ approval of the Plan of Dissolution, our Board of Directors declared a liquidating distribution of $6.85 per share of common stock outstanding on September 22, 2011, which was paid October 13, 2011 to stockholders of record on October ~~1, 2010~~6, 2011. This was the first liquidating distribution declared under the Plan of Dissolution.

Plan of Dissolution

As a result of the September 22, 2011 approval of the Plan of Dissolution by our stockholders, the following events have occurred, or the Company anticipates the following will occur:

The Company made a distribution of $139.4 million, equal to $6.85 per share of the Company’s common stock as (the “First Liquidating Distribution”) as a result of, among other things, the sales of a material portion of our assets;

We will seek to sell all or substantially all of our remaining assets (“Remaining Assets”);

We will seek to pay, or establish a reserve to pay, all of the Company’s liabilities, including without limitation (a) any liabilities arising out of the DOJ’s ICD investigation, (b) other currently unknown or unanticipated liabilities, and ~~November 1, 2010, respectively.~~(c) a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate under the General Corporation Law of the State of Delaware (“DGCL”) with respect to additional liabilities that may arise after the Filing (the “Liability Payment Condition”);

~~Equity~~
We will file a certificate of dissolution in accordance with Section 275 of the DGCL (the “Filing”) no later than the date which is on or about the one year anniversary date the Stockholders approved the Plan of Dissolution (the “Outside Filing Date”). However, the date of Filing may be extended by the Board of Directors under certain circumstances discussed below;

If prior to the Outside Filing Date the Board of Directors determines in the exercise of its fiduciary duties that the Company has (a) sold substantially all, but not necessarily all, of its Remaining Assets (the “Asset Sale Condition” and, together with the Liability Payment Condition, the “Additional Distribution Conditions”) and (b) satisfied the Liability Payment Condition, then the Company currently anticipates making one or more additional liquidating distributions (the “Additional Liquidating Distributions”, which defined term refers to any additional liquidating distributions made either before or after the Filing) prior to the Filing;

If the Board of Directors determines that the Additional Distribution Conditions have not been satisfied by the Outside Filing Date, then the Company currently anticipates calling a special meeting of its stockholders and submitting an additional proxy statement to seek the approval of our stockholders to delay the Filing for such additional period of time as the Board of Directors determines is advisable to provide the Company with an extended time period during which to satisfy the Additional Distribution Conditions and make additional liquidating distributions prior to the Filing (such extended date of the Filing hereafter referred to as the “Extended Filing Date”). If such approval from our stockholders is obtained, then the Filing will be delayed to the Extended Filing Date in accordance with the terms described in such subsequent proxy statement. If such approval to delay the Filing is not obtained from our stockholders, then the Filing will not be so delayed and the Filing will be made on or about the Outside Filing Date;

In addition to the First Liquidating Distribution, the Company will seek to make one or more Additional Liquidating Distributions to stockholders of the Company’s common stock as of the record date for any such distributions under the circumstances described herein.

•

The amount and timing of any Additional Liquidating Distributions may be subject to material reduction and delay based upon, among other factors: (i) the Company's ability to sell all or a substantial portion of the Remaining Assets as well as the timing and terms thereof, (ii) the payment or establishment of reserves to satisfy any liabilities arising out of the ICD Investigation, other currently unknown or unanticipated liabilities (which may be material) and the establishment of a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate under the DGCL with respect to additional liabilities that may arise or be identified after the Filing;

•

The Company has not been able to quantify a reserve for any liabilities, if any, arising out of the ICD Investigation, other currently unknown or unanticipated liabilities or a reserve of such additional amount as the Board of Directors determines to be necessary or appropriate under the DGCL with respect to additional liabilities that may arise or be identified after the Filing, the amounts of which may materially reduce the amount of any Additional Liquidating Distributions;

It is not possible to predict with certainty the portion of any Additional Liquidating Distributions which will be made before the Filing and the portion of any Additional Liquidating Distributions that will be made after the Filing, or the amount of any Additional Liquidating Distributions. The Board of Directors, in the exercise of its fiduciary duties, will make the determination as to whether and when the Additional Distribution Conditions have been satisfied which may be prior to the Outside Filing Date or the Extended Filing Date or after such dates;

As of the date of the Filing, the Company will close its stock transfer books and the Company’s common stock will cease to trade, and the Company anticipates publicly announcing, and filing with the SEC, a current report on Form 8-K informing our stockholders of the Company’s intention to make the Filing at least 20 days prior to the date on which such Filing is to be made;

After the Filing, the Company will seek to sell or otherwise liquidate its remaining assets in accordance with the provisions of Sections 280 and 281(a) of the DGCL which it has not sold prior to the Filing;

After the Filing, the Company will pay, or establish reserves for payment of, all of its liabilities and obligations in the manner provided under the DGCL. Those liabilities and obligations will include, among other things, all valid claims made against us and all expenses arising out of the sale of assets, the liquidation and dissolution provided for in the Plan of Dissolution and the liabilities associated with the pending ICD Investigation. We do not know the amount of these potential liabilities but currently believe that such amounts may be material and may materially reduce the amount of Additional Liquidating Distributions. Such payments and reserves will be made using the funds which the Company retains or collects as of or after the Filing;

After the Filing, when the Company has paid or made adequate provision for payment of all of its liabilities and obligations in the manner provided under the DGCL, including without limitation liabilities which may arise in respect of the ICD Investigation, successfully sold any of its Remaining Assets, one or more Additional Liquidating Distributions may be made to stockholders as of the record date for such distributions which record date shall be on or about the date of the Filing. The timing and amount of the benefits of the Tax Attributes realized by the Company will also affect the amounts and timing of any Additional Liquidating Distributions. We currently anticipate that any post-Filing Additional Liquidating Distributions would be made no sooner than at least the date which is approximately nine months after the Filing as a result of the dissolution process required pursuant to the DGCL and may not occur, if at all, until several years after the Filing. After the Filing, the Company may transfer some or all of its assets to a liquidating trust or limited liability company for the benefit of our stockholders.

Changes in Net Assets in Liquidation

The Company’s net asset value decreased approximately $1.3 million for the period from September 30, 2011 to December 31, 2011. The change in net ~~earnings~~assets was due to a $0.3 million positive impact related to operations, a $1.1 million reduction in the net realizable value of ~~unconsolidated affiliates.~~assets, and a $0.5 million decrease related to the reduction in estimated net liquidation costs during the wind-down period.

The net ~~earnings~~realizable value of ~~unconsolidated affiliates~~assets decline of $1.1 million was due to a $0.2 million reduction of the note receivable balance due related to the sale of one of the Company’s hospitals, a $0.2 million decrease in the estimated net realizable value of deposits that management now believes are ~~comprised~~not collectible and a $1.8 million reduction in the net realizable value of the Company’s investment in a partnership that owns a medical office building as a result of recent market offers. These declines were offset by a $1.1 million increase in our deferred tax assets in liquidation.

Activities relative to liquidation accruals related to the Company’s corporate division for the three months ended December 31, 2011 are as follows (in millions):


	September 30, 2011		Cash Payments			Adjustments to Accruals			December 31, 2011
Salaries, wages and benefits	$	11.2	$	(5.7	)	$	(0.8	)	$	4.7
Outsourcing information technology and central business office functions		1.6		(0.8	)		1.5			2.3
Contract breakage costs		2.8		—			—			2.8
Insurance		5.4		(2.1	)		(0.3	)		3.0
Legal, Board and other professional fees		11.6		(3.0	)		0.4			9.0
Office and storage expense		1.8		(0.1	)		(0.3	)		1.4
Lease expense		0.7		(0.2	)		—			0.5

Total liquidation accruals	$	35.1	$	(11.9	)	$	0.5		$	23.7

Salaries, wages and benefits were adjusted by $0.8 million to account for an increase in transition service revenues that offset our salaries, wages and benefits expense. We entered into several transition services agreements during fiscal 2011 with buyers of our ~~share~~assets to provide information technology and business office support. Some of ~~earnings in unconsolidated hospitals,~~these services were extended beyond their original service end date. We also entered into a ~~hospital realty investment and several ventures within~~new transition services agreement during our ~~MedCath Partners Division. The Company owned two unconsolidated hospitals until~~first quarter of fiscal 2012 with the ~~disposition~~buyer of ~~its~~Harlingen Medical Center (“HMC”). We sold our equity interest in ~~AHHSD on October 1, 2010.~~

~~Equity~~HMC effective November 30, 2011. The revenue we derive from these services offsets the expenses we incur at our corporate office to provide these services. In addition, the extension of these services increased our estimated expense related to our outsourcing of information technology and central business office functions by $1.5 million. The reduction in ~~net earnings of unconsolidated affiliates decreased~~insurance and office storage expenses was due to our ability to manage costs at the corporate level during the first quarter of fiscal ~~2011~~2012 offset by higher anticipated legal, board and professional fees related to ~~$0.6 million from $1.5 million for~~the ICD investigation.

Impact of Unknown Contingencies on Net Asset Realizable Value— The net realizable value of assets under Generally Accepted Accounting Principles (“GAAP”) may not represent the same amount we believe is distributable to our stockholders if we were to present a range of estimated proceeds available for distribution to our stockholders as presented in our August 17, 2011 proxy filing. The net realizable value of our assets under GAAP at December 31, 2011 does not take into consideration any estimated range of potential unknown contingencies. Accounting for contingencies under GAAP requires that the contingency be probable and estimable in order to be accrued. However, based on our prior experience, we do expect that we will incur contingencies during our wind-down period that we cannot estimate at this time. Such contingencies may include any amounts due to creditors as a result of ~~fiscal 2010. AHHSD contributed $1.0 million~~the DGCL process we will follow once we file for articles of ~~net earnings during the first quarter of fiscal 2010 and was disposed on October 1, 2010 resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases~~dissolution, any amounts due to the ~~disposition~~government for unknown reimbursement claims, such as recovery audits (“RAC” audits), cost report settlements, and any other unknown contingent liability that may arise during the normal course of ~~its interest~~operations during the wind-down period, including legal claims. We previously estimated a range of potential unknown contingencies in ~~Southwest Arizona Heart and Vascular Center, LLC~~our proxy filing filed with the Securities Exchange Commission on ~~November 1, 2010.~~

~~Net income attributable~~August 17, 2011 to ~~noncontrolling interest.~~~~Noncontrolling interest share~~be between $5.2 million to $19.8 million not including any contingency, which may be material, that may arise as a result of ~~earnings of consolidated subsidiaries increased to $11.4 million for~~ the ~~first quarter of fiscal 2011 from $0.8 million for the comparable period of fiscal 2010.~~

~~Net income attributable to noncontrolling interest increased $7.1 million and $2.2 million due~~DOJ’s investigation related to the ~~noncontrolling shareholders’ interest in the gains recognized in fiscal 2011 upon the disposition~~implantation of ~~the majority~~ICD’s, or $3.3 million to $13.0 million, net of ~~the assets of HHA and TexSan Heart Hospital, respectively.~~income tax, ($0.16 to $0.64 per common share). In addition, ~~the Company recognized an increase of $0.5 million due~~any contingency that may arise, if any, related to the ~~losses recognized at AzHH in~~Department of Justice's investigation related to the ~~first quarter~~implantation of ~~fiscal 2010 and~~ICD’s has also not been accrued when determining the ~~Company’s sale of its interest in AzHH on October 1, 2010.~~

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


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


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


	Page

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

Consolidated Statements of Net Assets in Liquidation as of December 31, 2011 and September 30, 2011		3

~~Item 1. Unaudited Financial Statements~~Consolidated Statement of Changes in Net Assets in Liquidation for the Three Months Ended December 31, 2011		34
~~Consolidated Balance Sheets as of December 31, 2010 and September 30, 2010~~			3
Consolidated ~~Statements~~Statement of Operations for the Three Months Ended December 31, 2010 ~~and 2009~~		4
~~Consolidated Statement of Stockholders’ Equity for the Three Months Ended December 31, 2010~~		5

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

Notes to Unaudited Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1815

Item 3. Quantitative and Qualitative Disclosures About Market Risk		2621

Item 4. Controls and Procedures		2621

PART II. OTHER INFORMATION		2621

Item 1. Legal Proceedings		2621

Item 1A. Risk Factors		2621

Item 6. Exhibits		2622

SIGNATURES		2822
~~EX-10.1~~
~~EX-10.2~~EX-31.1
~~EX-10.3~~
~~EX-10.4~~EX-31.2
~~EX-31.1~~
~~EX-31.2~~EX-32.1
~~EX-32.1~~
EX-32.2


	December 31,			September 30,
	2010			2010

Current assets:
Cash and cash equivalents	$	158,475		$	33,141
Accounts receivable, net		44,795			43,811
Income tax receivable		—			6,188
Medical supplies		10,644			10,550
Deferred income tax assets		7,815			13,247
Prepaid expenses and other current assets		12,902			13,453
Current assets of discontinued operations		57,345			47,920

Total current assets		291,976			168,310
Property and equipment, net		176,885			182,222
Other assets		11,652			24,716
Non-current assets of discontinued operations		1,232			119,290

Total assets	$	481,745		$	494,538


Current liabilities:
Accounts payable	$	19,957		$	15,716
Income tax payable		14,316			—
Accrued compensation and benefits		11,705			16,418
Other accrued liabilities		21,073			16,663
Current portion of long-term debt and obligations under capital leases		61,573			16,672
Current liabilities of discontinued operations		17,014			35,044

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

Total liabilities		155,343			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest in equity of consolidated subsidiaries		5,812			11,534

Stockholders’ equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 50,000,000 shares authorized; 22,262,431 issued and 20,308,070 outstanding at December 31, 2010 22,423,666 issued and 20,469,305 outstanding at September 30, 2010		216			216
Paid-in capital		457,952			457,725
Accumulated deficit		(102,752	)		(139,791	)
Accumulated other comprehensive loss		—			(444	)
Treasury stock, at cost; 1,945,361 shares at December 31, 2010 and September 30, 2010		(44,797	)		(44,797	)

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

Total equity		320,590			282,470

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


	December 31,		September 30,
	2011		2011
Assets:
Cash and cash equivalents	$	150,045	$	304,403
Accounts receivable		17,528		18,619
Notes receivable		22,122		22,317
Income tax receivable		3,073		7,636
Medical supplies		1,865		1,789
Prepaid expenses and other assets		2,435		2,605
Property and equipment		37,886		37,901
Deferred income tax assets		5,379		—
Investment in affiliates		3,125		13,400

Total assets	$	243,458	$	408,670


Liabilities:
Accounts payable	$	5,350	$	19,038
Accrued compensation and benefits		6,856		13,287
Dividends payable		—		139,373
Other accrued liabilities		23,579		28,342
Obligations under capital leases		456		520
Deferred income tax liabilities		—		459

Total liabilities		36,241		201,019
Noncontrolling interests at settlement amount		17,321		16,448

Total liabilities and noncontrolling interests		53,562		217,467

Net Assets in Liquidation	$	189,896	$	191,203


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

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


	Three Months Ended December 31,
	2010			2009

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

Total operating expenses		90,481			90,493

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

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

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

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

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

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


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

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


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

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


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

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


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

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


	Three months ended
	December 31, 2011
Net assets in liquidation as of September 30, 2011	$	191,203
Net operations from October 1, 2011 to December 31, 2011		272
Adjustments to net realizable value of assets		(1,067	)
Adjustments to accrued liquidation costs during the three months ended December 31, 2011		(512	)


Net assets in liquidation as of December 31, 2011	$	189,896


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

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

Total comprehensive income																								45,416			3,493

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


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


	Three Months Ended December 31,
	2010
Net revenue	$	38,840
Operating expenses:
Personnel expense		17,746
Medical supplies expense		8,084
Bad debt expense		5,625
Other operating expenses		14,113
Depreciation		2,248
Loss on disposal of property, equipment and other assets		42

Total operating expenses		47,858

Loss from operations		(9,018	)
Other income (expenses):
Interest expense		(965	)
Interest and other income		69
Gain on sale of unconsolidated investees		15,391
Equity in net earnings of unconsolidated affiliates		331

Total other income (expense), net		14,826

Income from continuing operations before income taxes		5,808
Income tax expense		2,140

Income from continuing operations		3,668
Income from discontinued operations, net of taxes		44,797

Net income		48,465
Less: Net income attributable to noncontrolling interest		(11,426	)

Net income attributable to MedCath Corporation	$	37,039


Amounts attributable to MedCath Corporation common stockholders:
Income from continuing operations, net of taxes	$	3,470
Income from discontinued operations, net of taxes		33,569

Net income	$	37,039


Earnings per share, basic
Income from continuing operations attributable to MedCath
Corporation common stockholders	$	0.17
Income from discontinued operations attributable to MedCath
Corporation common stockholders		1.69

Earnings per share, basic	$	1.86


Earnings per share, diluted
Income from continuing operations attributable to MedCath
Corporation common stockholders	$	0.17
Income from discontinued operations attributable to MedCath
Corporation common stockholders		1.69

Earnings per share, diluted	$	1.86


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

Weighted average number of shares, diluted		19,947

	•		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.


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

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


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


	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	%


	Three Months Ended December 31,
Payor	2010			2009
Medicare		50.8	%		53.9	%
Medicaid		4.3	%		3.9	%
Commercial and other, including self-pay		44.9	%		42.2	%

Total consolidated net revenue		100.0	%		100.0	%


				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	)%


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	)


	Net Assets Available for Distribution
	(in thousands)
Category
Total assets	$	243,458
Wind down related costs		35,785
Obligations under capital leases		456

Total liabilities		36,241
Noncontrolling interests at settlement amount		17,321

Total liabilities and noncontrolling interests		53,562

Net assets available for distribution	$	189,896

Net assets available for distribution per common share	$	9.33


Exhibit No.		Description
~~Exhibit No.~~10.1		~~Description~~

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

~~2.2~~		~~Amendment to the Asset Purchase Agreement dated as of October 29, 2010~~ by and between ~~St. David’s~~Prime Healthcare Services, Inc. and Harlingen Partnership ~~L.P.~~Holdings, Inc., HMC Management Company, LLC and ~~Heart~~Harlingen Hospital ~~IV, L.P. (1)~~


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

~~2.3~~		~~Asset Purchase Agreement~~Management, Inc. dated as of November ~~5, 2010 by and between Methodist Healthcare System of San Antonio, LTD., L.L.P. and Heart Hospital of San Antonio, LP(2)~~30, 2011.(1)

~~3.1~~		~~Amended and Restated Bylaws of MedCath Corporation(3)~~

10.1*		~~Amendment to Employment Agreement dated and effective December 30, 2010 by and between MedCath Corporation and O. Edwin French~~

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

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

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

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

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

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

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

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

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

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


*		~~Indicates a management contract or compensatory plan or agreement.~~

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

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

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

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

~~(5)~~		~~Incorporated by reference from the Company’s Current Report on Form 8-K filed November 15, 2010.~~December 13, 2011.



	MEDCATH CORPORATION

Dated: February 9, ~~2011~~	~~By:~~	~~/s/ O. EDWIN FRENCH~~
2012		~~O. Edwin French~~
		~~President and Chief Executive Officer~~ ~~(principal executive officer)~~ By:


	~~By:~~	/s/ JAMES A. PARKER

			James A. Parker
		~~Executive Vice President and~~ ~~Chief Financial Officer (principal financial officer)~~

			President and Chief Executive Officer (principal executive officer)

			By:	/s/ LORA RAMSEY

			Lora Ramsey
				Vice President and ~~Controller~~ Chief Financial Officer (principal financial and accounting officer)