MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except percentages and per share data)
~~See~~
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 146), (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 ~~discussions~~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.
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 ~~determination~~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 ~~fair value.~~

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)
2.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 ~~Financial Accounting Standards Board (the “FASB”)~~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~~

operations are not presented separately under 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 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 ~~required under GAAP,~~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 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 of ~~$34.3~~$32.4 million has been included in income ~~(loss)~~ from discontinued operations for the ~~six~~three months ended ~~March~~December 31, ~~2011.~~

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.

2010.

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 ~~six~~three months ended ~~March~~December 31, ~~2011.~~

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.~~capital. The transaction closed on November 1, 2010. The gain of $35.7 million has been included in income ~~(loss)~~ from discontinued operations for the ~~six~~three months ended ~~March~~December 31, ~~2011.~~

During May 2008, the Company sold the net assets of Dayton Heart Hospital (“DHH”) to Good Samaritan Hospital pursuant to a definitive agreement. As of March 31, 2011 and September 30, 2010, the Company had reserved $10.3 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.

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

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~~master agreement for ~~Revenue Cycle Outsourcing~~revenue cycle outsourcing with Dell Marketing L.P. (“Dell”) whereby Dell would assume the responsibility for collection of outstanding accounts receivable for ~~our~~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 March 31, Six Months Ended March 31,
2011 2010 2011 2010

Net revenue $ (1,250 ) $ 63,045 $ 20,754 $ 122,431
Gain (loss) from dispositions, net — — 69,903 —
Loss on early termination of debt — — (11,130 ) —
(Loss) income before income taxes (2,122 ) (3,188 ) 55,640 (4,610 )
Income tax (benefit) expense (721 ) (1,254 ) 17,913 (1,546 )

Net (loss) income (1,401 ) (1,934 ) 37,727 (3,064 )
Less: Net loss (income) attributable to noncontrolling interest 247 (305 ) (9,004 ) 70

Net income (loss) attributable to MedCath Corporation $ (1,154 ) (2,239 ) $ 28,723 $ (2,994 )

March 31, September 30,
2011 2010

Cash and cash equivalents $ 42,324 $ 13,889
Accounts receivable, net 3,934 23,597
Other current assets 361 10,434

Current assets of discontinued operations $ 46,619 $ 47,920

Property and equipment, net $ — $ 115,670
Other assets 1,152 3,620

Long-term assets of discontinued operations $ 1,152 $ 119,290

Accounts payable $ 12,120 $ 25,379
Accrued liabilities and current portion of obligations under capital leases 2,054 9,665

Current liabilities of discontinued operations $ 14,174 $ 35,044

Long-term debt $ — $ 35,302
Other long-term obligations — 666

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

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.


	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 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 March 31, 2011 and September 30, 2010.

~~4. Accounts Receivable~~

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

March 31, September 30,
2011 2010
Receivables, principally from patients and third-party payors $ 119,152 $ 103,314
Receivables, principally from billings to hospitals for various cardiovascular procedures 1,237 1,027
Other 3,125 2,555

123,514 106,896
Less allowance for doubtful accounts (73,766 ) (63,085 )

Accounts receivable, net $ 49,748 $ 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 ~~March~~December 31, 2011, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method. ~~At March~~As of December 31, 2011, the ~~Company~~Company’s net realizable value in a partnership that owns a ~~noncontrolling~~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 entered into a 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.~~

~~On January 1, 2011, MedCath Partners sold its 14.8% equity interest in Central New Jersey Heart Services, LLC for $0.6 million and recognized~~transaction of $20.4 million. As a result of the tax gain, ~~of $0.2 million.~~

~~On November 1, 2010,~~ the ~~Company sold its equity interest in Southwest Arizona Heart and Vascular Center, LLC for $7.0~~net after-tax proceeds from the transaction were $0.3 million. The Company ~~recognized a $1.8 million write down of~~had previously adjusted its ~~investment~~investments in ~~the fourth quarter of fiscal 2010~~Harlingen Medical Center and HMC Realty, LLC to ~~record the Company’s investment in such business at its~~their net realizable value ~~expected from~~and had adjusted it deferred income taxes based on this gain. Accordingly, no adjustment to the ~~sale proceeds. Prior to its disposition,~~net assets in liquidation was required for this transaction during the ~~Company had accounted for its investment in Southwest Arizona Heart and Vascular Center, LLC using the equity method of accounting.~~

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. 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.

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

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

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 March 31, Six Months Ended March 31,
2011 2010 2011 2010

Net revenue $ 34,935 $ 59,390 $ 70,903 $ 115,173
Income from operations $ 7,172 $ 15,116 $ 13,597 $ 23,666
Net income $ 5,217 $ 12,885 $ 9,657 $ 18,979

March 31, September 30,
2011 2010

Current assets $ 33,094 $ 58,690
Long-term assets $ 75,953 $ 144,402
Current liabilities $ 13,308 $ 23,922
Long-term liabilities $ 96,955 $ 121,524

6. ~~Long-Term Debt~~

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

March 31, September 30,
2011 2010

Amended Credit Facility $ 30,166 $ 66,563
Less current portion (30,166 ) (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 provided for a three-year term loan facility in the amount of $75.0 million (the “Term Loan”) and a revolving credit facility in the amount of $85.0 million (the “Revolver”), which included a $25.0 million sub-limit for the issuance of stand-by and commercial letters of credit (of which $1.7 million were outstanding as of March 31, 2011 and September 30, 2010) and a $10.0 million sub-limit for swing-line loans. Borrowings under the Amended Credit Facility, excluding swing-line loans, bore interest per annum at a rate equal to the sum of LIBOR plus the applicable margin or the alternate base rate plus the applicable margin. At March 31, 2011 the Term Loan bore interest at 3.25%. The $30.2 million and $66.6 million outstanding under the Amended Credit Facility at March 31, 2011 and September 30, 2010, respectively, related to the Term Loan. On May 9, 2011, the Company repaid the $30.2 million outstanding amount of the Term Loan. No amounts were outstanding under the Revolver as of March 31, 2011 and September 30, 2010. On May 9, 2011 concurrent with the repayment of the Term Loan, the Amended Credit Facility was terminated. See Note 15.

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

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

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

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

The Company was required to make mandatory prepayments of principal in specified amounts upon the occurrence of certain events identified in the Amended Credit Facility and was permitted to make voluntary prepayments of principal under the Amended Credit Facility. The Term Loan was 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. However, the Term Loan was paid in full on May 9, 2011 and the facility was terminated. See Note 15.

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 installments, during the three and six months ended March 31, 2011, the Company paid $26.8 million and $31.9 million, respectively, 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 provided 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 $27.6 million at March 31, 2011 for mandatory repayment of principal using net cash proceeds from asset dispositions. Under terms of the First Amendment, the fixed charge coverage ratio was not required to be tested at September 30, 2010 or December 31, 2010, and was tested at March 31, 2011.

~~Debt Covenants~~~~—As of March 31, 2011 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 of~~ one of its hospitals, whereby call and put options were added relative to the Company’s noncontrolling interest in the hospital. The call allowed the Company to acquire all of the noncontrolling interest in the hospital owned by physician investors for the net amount of the physician investors’ unreturned capital contributions adjusted upward for any proportionate share of additional proceeds upon a disposition transaction. The put allowed the Company’s noncontrolling ~~shareholders~~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 million, of~~ which ~~$4.6 million was paid during the quarter ended March 31, 2011 and $1.1~~$3.0 million remains ~~in other accrued liabilities~~outstanding as of ~~March~~December 31, 2011.

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

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

In January 2011, the Company entered into an agreement with the noncontrolling shareholders of one of its hospitals whereby the Company obtained the right to sell all or substantially all of the assets of that hospital. Concurrent with such amendment and as a condition thereto, an approval, consent and proxy were obtained from the Company’s noncontrolling members in 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 ($3.5 million at March 31, 2011) adjusted upward for any proportionate share of additional proceeds upon a disposition transaction.

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

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

In 2005, CMS ~~uses~~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 ~~March~~December 31, 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 hospitals. The U.S. Department of Justice (“DOJ”) initiated an investigation related to the Company’s return of these reimbursements. As a result of the DOJ’s investigation, the Company negotiated settlement agreements with the DOJ whereby the Company paid $0.8 million to settle and obtain releases from any federal civil false claims liability related to the DOJ’s investigation. The DOJ allegations did not involve patient care, and related solely to whether the procedures were properly reimbursable by Medicare. The settlement did not include any finding of wrong-doing or any admission of liability. 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 the results of this investigation could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

liquidation.

MEDCATH CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

~~In September~~

On March 12, 2010, the ~~Company received~~DOJ issued a ~~letter from the DOJ advising it that an investigation is being conducted~~Civil Investigative Demand (“CID”) to ~~determine whether certain~~one of the Company’s ~~other~~ hospitals ~~have submitted claims excluded from coverage.~~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 ~~of time covered by the investigation is 2003~~2002 to the present. The ~~letter states that~~Company has provided materials responsive to the DOJ’s data indicate 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 manyCID.

On September 17, 2010, consistent with letters received by other hospitals and hospital systems, ~~across~~ the ~~country~~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 ~~well~~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 ~~manufacturers themselves.~~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 ~~is fully cooperating~~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 ~~investigation~~ICD Investigation, and continues to review the ICD implantations under investigation. Pursuant to the DOJ’s requests, the Company has entered into a tolling ~~agreement with~~agreements that tolled the ~~government in this investigation. The Company has met with the DOJ on one occasion to provide examples~~statute of ~~the Company’s documentation~~limitations for ~~such ICD cases~~allegations related to ~~one of its other hospitals.~~ICDs until October 31, 2012. To date, the DOJ has not asserted any ~~claim~~claims against the ~~Company’s hospitals~~Company and the Company expects to continue to have input into the investigation. Because the ~~Company~~investigation is in ~~the~~its early stages, ~~of this investigation,~~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.~~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 ishistorically has been a material component of total net patient revenue and the results of this investigation could have a material ~~adverse~~ effect on the Company’s ~~financial condition, results of operations~~net assets in liquidation and ~~cash flows.~~

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 ~~March~~December 31, 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 ~~$2.5~~$1.2 million and ~~$2.7~~$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. As of October 9, 2010, the Company entered into a guaranteed cost plan for workman’s compensation. The Company was also covered by a guaranteed cost program up to September 2007. From October 2007 through 2010, the Company was self-insured with loss limitations of $250,000 per occurrence with no annual aggregate limits. The total estimated reserve for self-insured liabilities for workman’s compensation, employee health and dental claims was ~~$2.5~~$0.4 million and ~~$3.3~~$1.0 million as of ~~March~~December 31, 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 ~~programs~~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 March 31, 2011, the maximum potential future payments that the Company could be required to make under these guarantees was $26.5 million through June 2013. At March 31, 2011 the Company had total liabilities of $9.2 million for the fair value of these guarantees, of which $7.0 million is in other accrued liabilities and $2.2 million is in other long term obligations. Additionally, the Company had assets of $9.6 million representing the future services to be provided by the physicians, of which $7.0 million is in prepaid expenses and other current assets and $2.6 million is in other assets.

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

~~8. Earnings per~~7. Per Share Data

Basic— The calculation of basic earnings per share includes ~~194,100 and 177,400~~150,900 of restricted stock units that have vested but as of ~~March~~December 31, ~~2011 and~~ 2010 ~~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 ~~854,812 and 975,637~~913,812 shares of common stock at prices ranging from $9.95 to $33.05, which were outstanding at ~~March~~December 31, ~~2011 and~~ 2010 ~~respectively,~~ as well as ~~281,912 and 848,300~~309,405 shares of restricted stock which were outstanding at ~~March~~December 31, 2011 and 2010, respectively. No options or restricted stock were included in the calculation of diluted earnings per share for the three months ended March 31, 2011, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.2010. Dilutive options of ~~5,799~~3,941 have been included in the calculation of diluted earnings (loss) per share ~~for the six months ended March~~at December 31, ~~2011.~~2010. Of the outstanding stock options, ~~824,000~~897,500 options have not been included in the calculation of diluted earnings per share ~~for the six months ended March~~at December 31, ~~2011,~~2010, because the options were anti-dilutive. No options or restricted stock were included in the calculation of diluted earnings per share for the three and six months ended March 31, 2010, as the consideration of such shares would be anti-dilutive due to the loss from continuing operations, net of tax.

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 ~~and six~~ months ended ~~March~~December 31, ~~2011~~2010 was ~~$0.9 million and $2.9 million, respectively.~~$1.9 million. The associated tax benefits related to the compensation expense recognized for the three ~~and six~~ months ended ~~March 31, 2011 was $0.4 million and $1.1 million, respectively. Stock based compensation expense recorded during the three and six months ended March~~December 31, 2010 was ~~$1.2 million and $1.8 million, respectively. The associated tax benefits related to the compensation expense recognized for~~$0.8 million. During the three ~~and six~~ months ended ~~March~~December 31, 2010, ~~was $0.5 million and $0.7 million, respectively.~~

~~Stock Options~~

~~The following tables summarize the Company’s~~18,325 stock ~~option activity:~~

For the Three Months Ended
March 31, 2011 March 31, 2010
Weighted- Weighted-
Number of Average Number of Average
Stock Options Exercise Price Stock Options Exercise Price
Outstanding stock options, beginning of period 913,812 $ 21.89 986,637 $ 22.23

Cancelled (59,000 ) 22.27 (11,000 ) 29.49

Outstanding stock options, end of period 854,812 $ 21.86 975,637 $ 22.14

For the Six Months Ended
March 31, 2011 March 31, 2010
Weighted- Weighted-
Number of Average Number of Average
Stock Options Exercise Price Stock Options Exercise Price
Outstanding stock options, beginning of period 932,137 $ 21.89 1,027,387 $ 22.25

Cancelled (77,325 ) 22.16 (51,750 ) 24.33

Outstanding stock options, end of period 854,812 $ 21.86 975,637 $ 22.14

options were cancelled.

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

Restricted Stock Awards

There were no grants of restricted stock during the three months ended December 31, 2010. All restricted stock granted became fully vested on September 30, 2011. During the three ~~and six~~ months ended ~~March 31, 2011, the Company did not grant any shares of restricted stock to employees. During the three and six months ended March~~December 31, 2010, the Company granted to employees 32,235 and 401,399 shares of restricted stock, respectively. 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 equal installments on December 31 over a three year period. The second grant vests annually on December 31 over a three year period if certain performance conditions are met. All unvested restricted stock granted to employees becomes fully vested upon a change in control of the Company as defined in the Company’s 2006 Stock Option and Award Plan. During the three and six months ended March 31, 2011, the Company granted 43,200 shares of restricted stock units to directors. During the three and six months ended March 31, 2010, the Company granted 89,600 shares of restricted stock units to directors. Restricted stock units granted to directors are fully vested at the date of grant and are paid in shares of common stock upon each applicable director’s termination of service on the board. At March 31, 2011, the Company had $1.4 million of unrecognized compensation expense associated with423,980 restricted stock awards.

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

For the Three Months Ended
March 31, 2011 March 31, 2010
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 460,305 $ 7.99 923,270 $ 8.54

Granted 43,200 13.89 121,835 8.01
Vested (11,192 ) 7.97 (13,700 ) 7.33
Cancelled (16,301 ) 7.78 (5,705 ) 9.21

Outstanding restricted stock awards and units, end of period 476,012 $ 8.53 1,025,700 $ 8.49

For the Six Months Ended
March 31, 2011 March 31, 2010
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 43,200 13.89 490,999 7.24
Vested (435,172 ) 9.38 (103,895 ) 9.04
Cancelled (16,301 ) 7.78 (15,731 ) 9.10

Outstanding restricted stock awards and units, end of period 476,012 $ 8.53 1,025,700 $ 8.49

and units previously granted became vested.

9. Subsequent Events

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

~~10. Reportable Segment Information~~

~~At March~~MedCath received a secured promissory note from CCG for its purchase of LMCHH that was to mature on January 31, ~~2011, the Company’s reportable segments consist of the Hospital Division and the MedCath Partners Division.~~

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

Three Months Ended March 31, Six Months Ended March 31,
2011 2010 2011 2010

Net revenue:
Hospital Division $ 94,996 $ 93,881 $ 181,614 $ 178,263
MedCath Partners Division 2,057 2,786 4,285 6,122
Corporate and other 110 110 164 222

Consolidated totals $ 97,163 $ 96,777 $ 186,063 $ 184,607

(Loss) income from operations:
Hospital Division $ (13,621 ) $ (9,363 ) $ (9,616 ) $ (9,381 )
MedCath Partners Division 77 (189 ) 121 (364 )
Corporate and other (3,546 ) (3,384 ) (9,176 ) (5,856 )

Consolidated totals $ (17,090 ) $ (12,936 ) $ (18,671 ) $ (15,601 )

March 31, September 30,
2011 2010
Aggregate identifiable assets:
Hospital Division $ 266,515 $ 414,656
MedCath Partners Division 10,314 20,210
Corporate and other 144,200 59,672

Consolidated totals $ 421,029 $ 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.

~~On May 4, 2011, the Company sold substantially all the assets of the MedCath Partners Division.~~

~~The Hospital Division assets include $46.3 million and $165.7 million of assets related to discontinued operations as of March 31, 2011 and September 30, 2010, respectively.~~

~~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%.

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

~~12. Comprehensive (Loss) Income~~

Three Months Ended March 31, Six Months Ended March 31,
2011 2010 2011 2010

Net (loss) income $ (10,306 ) $ (8,685 ) $ 38,159 $ (10,502 )
Changes in fair value of interest rate swap, net of tax benefit — (24 ) — 32
Reclassification of amounts included in net income, net of tax expense — — 444 —

Comprehensive (loss) income (10,306 ) (8,709 ) 38,603 (10,470 )
Less: Net income attributable to noncontrolling interest (3,189 ) (2,524 ) (14,615 ) (3,364 )

Comprehensive (loss) income attributable to MedCath Corporation common stockholders $ (13,495 ) $ (11,233 ) $ 23,988 $ (13,834 )

~~13. Property and Equipment~~

March 31, September 30,
2011 2010

Land $ 16,518 $ 17,635
Buildings 137,577 149,897
Equipment 149,918 163,746
Construction in progress 83 25

Total, at cost 304,096 331,303
Less accumulated depreciation (150,627 ) (149,081 )

Property and equipment, net $ 153,469 $ 182,222

The Company recorded $19.5 million of impairment charges to the consolidated statement of operations during the second quarter ended March 31, 2011. See Note 1 for further discussion related to these impairment charges.

~~14. Fair Value Measurements~~

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

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

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

	•		Level 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.

Impairment
for the three
Quoted Significant and six month
Market Significant Other Unobservable period ended
Price Observable Inputs Inputs March 31,
(Level 1) (Level 2) (Level 3) 2011
Long-lived assets held and used $ — $ — $ 44,700 $ (19,548 )

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

As described in Note 1, the Company recorded an impairment charge of $19.5 million for the write-down of buildings and equipment in the Hospital Division. The charge relates to two of the Company’s hospitals in which there was a decline in the estimated fair value of fixed assets based on market based sales of comparable assets as well as a decline in estimated discounted cash flows.

Based on Level 2 inputs, the fair value of long-term debt, including the current portion, at March 31, 2011 approximates the carrying value. Based on Level 2 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 inputs.~~

~~15. Subsequent Events~~

On May 4, 2011 the Company sold the majority of the assets of its MedCath Partners division to DLP Healthcare, a joint venture of LifePoint Hospitals and Duke University Health System. The transaction valued the assets acquired 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 will retain working capital related to the assets sold and will also retain assets related to cath labs leased to two health care systems outside of North Carolina as well as its minority ownership in Coastal Carolina Heart. Further, MedCath will retain certain assets and liabilities arising from this business that arose before closing.

~~On May 5, 2011 the Company sold its’ 9.2% membership interest in Coastal Carolina Heart for $5.0 million to New Hanover Regional Medical Center.~~

On May 9, 2011 the Company used the net proceeds from the sale of MedCath Partners assets, along with available cash, to repay the $30.2 million outstanding under its credit facility and also terminated the facility on that date.

On May 9, 2011, the Company announced it had entered into definitive agreements to sell its’ equity in Arkansas Heart Hospital and, along with it physician partners, to sell certain assets and liabilities of Heart Hospital of New Mexico (the “Transactions”). The closing of the Transactions is conditioned upon, among other customary conditions, approval of the holders of a majority of the shares of the Company’s common stock. The Company anticipates that it will receive approximately $60.0 million from the sale of its’ equity in AHH after the payment of taxes and closing costs and approximately $62.0 million from the sale of HHNM after liquidation of retained net working ~~capital and the payment of taxes and closing costs.~~

In addition to seeking shareholder approval of the Transactions, the Company will simultaneously seek approval of a plan of dissolution. Upon adoption of the plan of dissolution (the “Dissolution”), the Company will wind up its affairs and distribute its assets in the form of a distribution to shareholders.

The Company’s shareholders are urged to read the proxy statement which the Corporation anticipates it will file with the Securities and Exchange Commission during its’ third fiscal quarter ending June 30, 2011 because it will contain important information about the Transactions, the Dissolution, the solicitation of proxies and related matters. The proxy statement will be available for free at the Securities and Exchange Commission’s website and from the Company.

capital.

~~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 on Form 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 March 31, 2011, 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: Arizona, Arkansas, California, Louisiana, New Mexico and Texas. Each of our majority-owned hospitals is a freestanding, licensed general acute care hospital that provides a wide range of health services with a majority focus on cardiovascular care. Each of our hospitals has a 24-hour emergency room staffed by emergency department physicians.

In addition to our hospitals, we previously owned or managed seven cardiac diagnostic and therapeutic facilities. Six of these facilities were 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 operated two mobile cardiac catheterization laboratories which operate on set routes and offer only diagnostic procedures. We refer to our diagnostics division as “MedCath Partners.” On May 4, 2011, the Company sold substantially all the assets of MedCath Partners to DLP Healthcare.

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 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 ~~several transactions, including~~ 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 ~~our~~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 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 ~~our~~the Company’s approximate 27.0% ownership interest in Southwest Arizona Heart and Vascular, LLC ~~and~~(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. Since the completion of these sales, we have received $113.9 million~~Hospital in total cash proceeds and currently estimate that we may receive an additional $25.0 million after we complete the liquidation of any remaining working capital and the estimated payment of income taxes for the legal entities we continue to own, but prior to any estimate for any unknown liabilities/contingencies. This estimate will be updated periodically during the wind-down of these entities.

Since March 1, 2010, we have incurred approximately $11.9 million in expenses directly related to the strategic options process. These costs include legal, consulting, board fees, retention bonuses and closing costs related to transactions. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown.

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. 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 to us 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. On May 4, 2011,~~ the Company sold the majority of ~~its~~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 ~~MedCath Partners Division.~~division’s assets to DLP Healthcare, a joint venture of Lifepoint Hospitals, Inc. and Duke University Health System for $25.0 million. The ~~following table sets forth~~transaction was completed effective May 4, 2011.

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

The disposition of ~~each~~the Company’s 70.3% of ~~our consolidating divisions~~ownership interest and management rights in Arkansas Heart Hospital to ~~consolidated net revenue in the periods indicated below.~~

Three Months Ended March 31, Six Months Ended March 31,
Division 2011 2010 2011 2010
Hospital 97.8 % 97.0 % 97.6 % 96.6 %
MedCath Partners 2.1 % 2.9 % 2.3 % 3.3 %
Corporate and other 0.1 % 0.1 % 0.1 % 0.1 %

Net Revenue 100.0 % 100.0 % 100.0 % 100.0 %

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

~~The following table sets forth the percentage of consolidated net revenue we earned by category of admitting payor in the periods indicated.~~

Consolidated Consolidated
Three Months Ended March 31, Six Months Ended March 31,
Payor 2011 2010 2011 2010
Medicare 51.1 % 50.1 % 52.3 % 52.1 %
Medicaid 3.3 % 3.8 % 4.0 % 3.8 %
Commercial and other, including self-pay 45.6 % 46.1 % 43.7 % 44.1 %

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

A significant portion of our net revenue is derived from federal and state governmental healthcare programs, including Medicare and Medicaid, and we expect the net revenue that we receive from the Medicare program as$73.0 million plus a percentage of ~~total consolidated net revenue will remain significant~~the hospital’s available cash. The transaction was completed on July 31, 2011.

The disposition of Heart Hospital of New Mexico in ~~future periods. Our payor mix may fluctuate~~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 ~~future periods due~~Louisiana Medical Center and Heart Hospital (“LMCHH”) to ~~changes in reimbursement, market and industry trends with self-pay patients, and other similar factors.~~

~~The Medicare and Medicaid programs are~~Cardiovascular Care Group for $23.0 million on September 30, 2011, subject to ~~statutory and regulatory changes, retroactive and prospective rate~~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 ~~administrative rulings, court decisions, audits, investigations, executive orders and freezes and funding reductions, all~~for final net working capital were made.

The disposition 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 March 31, 2011 Compared to Three Months Ended March 31, 2010~~

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

Three Months Ended March 31,
(in thousands except percentages)
Increase/
(Decrease) % of Net Revenue
2011 2010 % 2011 2010
Net revenue $ 97,163 $ 96,777 0.4 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 33,859 33,150 2.1 % 34.8 % 34.3 %
Medical supplies expense 23,189 23,581 (1.7 )% 23.9 % 24.4 %
Bad debt expense 10,006 9,931 0.8 % 10.4 % 10.3 %
Other operating expenses 22,843 22,296 2.5 % 23.5 % 23.0 %
Depreciation 4,630 6,124 (24.4 )% 4.8 % 6.2 %
Impairment of long-lived assets 19,548 14,700 100.0 % 20.1 % 15.2 %
Loss (gain) on disposal of property, equipment and other assets 178 (69 ) (358.0 )% — (0.1 )%

Loss from operations (17,090 ) (12,936 ) 32.1 % (17.7 )% (13.4 )%
Other income (expenses):
Interest expense (997 ) (1,054 ) 5.4 % (0.9 )% (1.1 )%
Interest and other income 50 15 233.3 % 0.1 % 0.0 %
Gain on sale of unconsolidated affiliates 179 — N/M 0.2 % —
Loss on note receiveable — (1,507 ) (100.0 )% — —
Equity in net earnings of unconsolidated affiliates 1,258 3,092 (59.3 )% 1.3 % 3.2 %

Loss from continuing operations before income taxes (16,600 ) (12,390 ) 34.0 % (17.1 )% (12.8 )%
Income tax benefit (7,695 ) (5,639 ) 36.5 % (7.9 )% (5.8 )%

Loss from continuing operations (8,905 ) (6,751 ) 31.9 % (9.2 )% (7.0 )%
Loss from discontinued operations, net of taxes (1,401 ) (1,934 ) (27.6 )% (1.4 )% (2.0 )%

Net loss (10,306 ) (8,685 ) 18.7 % (10.6 )% (9.0 )%
Less: Net income attributable to noncontrolling interest (3,189 ) (2,524 ) 26.3 % (3.3 )% (2.6 )%

Net loss attributable to MedCath Corporation $ (13,495 ) $ (11,209 ) 20.4 % (13.9 )% (11.6 )%

Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes $ (12,341 ) $ (8,970 ) 37.6 % (12.7 )% (9.3 )%
Loss from discontinued operations, net of taxes (1,154 ) (2,239 ) (48.5 )% (1.2 )% (2.2 )%

Net loss $ (13,495 ) $ (11,209 ) 20.4 % (13.9 )% (11.6 )%

Three Months Ended March 31,
2011 2010 % Change
Selected Operating Data (a):

Number of hospitals 5 5
Licensed beds (b) 421 421
Staffed and available beds (c) 380 380
Admissions (d) 4,905 4,918 (0.3 )%
Adjusted admissions (e) 7,231 7,257 (0.4 )%
Patient days (f) 18,840 18,690 0.8 %
Adjusted patient days (g) 28,018 27,626 1.4 %
Average length of stay (days) (h) 3.84 3.80 1.0 %
Occupancy (i) 55.1 % 54.6 %
Inpatient catheterization procedures (j) 1,940 2,054 (5.6 )%
Inpatient surgical procedures (k) 1,187 1,171 1.4 %
Hospital net revenue (in thousands except percentages) $ 94,996 $ 93,881 1.2 %


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

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

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

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

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

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

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

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

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

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

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

~~Net Revenue.~~Our consolidated net revenue increased 0.4% or $0.4 million, to $97.2 million for the second quarter of fiscal 2011 from $96.8 million for the second quarter of fiscal 2010. Hospital Division net revenue increased 1.2%, or $1.1 million, for the second quarter of fiscal 2011 compared to the same period of fiscal 2010.

Inpatient net revenue declined approximately 0.9%, while inpatient cases increased 0.4% in the second quarter of fiscal 2011 compared to the same period of the prior year. Inpatient net patient revenue was 69.7% and 70.8% of total net patient revenue for the fiscal quarter ending March 31, 2011 and March 31, 2010, respectively. Total cardiovascular related inpatient net revenue was approximately 65% of total net inpatient revenue for the second fiscal quarter of 2011 versus approximately 70% for the second fiscal quarter of fiscal 2010. The decline in cardiovascular related net revenue as a percentage of total net inpatient revenue is a direct result of the net revenue from Hualapai Mountain Medical Center ~~(“HMMC”), our general acute care hospital~~in which ~~began operations at~~ the ~~beginning of fiscal 2010.~~

~~Our outpatient net patient revenue increased approximately 4.8% during~~Company sold the ~~second quarter of fiscal 2011 compared to the same period~~majority of the ~~prior year. Our outpatient cases, excluding emergency department visits, increased 30.3% during the second fiscal quarter ending March 31, 2011 compared~~hospitals assets to ~~the same period~~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 ~~prior year. Our emergency department visits increased 6.6% during~~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 ~~second quarter ending March 31, 2011 compared~~real estate related to ~~the same period~~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 ~~prior year. Our outpatient net revenue benefited from~~Plan of Dissolution, our Board of Directors declared a ~~58.9% increase in outpatient cases at HMMC,~~liquidating distribution of $6.85 per share of common stock outstanding on September 22, 2011, which ~~has seen an increase in cases since it began operations at~~was paid October 13, 2011 to stockholders of record on October 6, 2011. This was the ~~beginning~~first liquidating distribution declared under the Plan of ~~fiscal 2010.~~

~~Net revenue for the second quarter~~Dissolution.

Plan of fiscal 2011 included charity care deductions of $2.4 million compared to charity care deductions of $1.8 million for the second quarter of fiscal 2010. The increase is the result of more uninsured patients applying and qualifying for charity care.

~~Personnel expense.~~Our consolidated personnel expense increased 2.1%, or $0.7 million, to $33.9 million, or 34.8% of net revenue, for the second quarter of fiscal 2011 from $33.2 million, or 34.3% of net revenue, for the second quarter of fiscal 2010.

The $0.7 million increase in personnel expense is due solely to a $0.7 million increase in medical benefits expense due to an increase in employee medical claims. All other personnel related expenses, including salaries and bonus expense, were flat year over year.

~~Medical supplies expense.~~~~Our consolidated medical supplies expense decreased 1.7%, or $0.4 million, to $23.2 million for the second quarter of fiscal 2011 from $23.6 million for the second quarter of fiscal 2010.~~

~~The $0.4 million decrease in medical supplies expense is~~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 ~~decline in cardiovascular cases that use high dollar medical supplies and a reduction in sales tax expense on certain medical supplies. We have been able~~distribution of $139.4 million, equal to ~~reduce our overall sales tax expense on medical supplies at certain~~$6.85 per share of ~~our hospitals~~the Company’s common stock as (the “First Liquidating Distribution”) as a result of, among other things, the sales of a ~~sales tax review completed during~~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 ~~first fiscal quarter~~Company’s liabilities, including without limitation (a) any liabilities arising out of ~~2011.~~the DOJ’s ICD investigation, (b) other currently unknown or unanticipated liabilities, and (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”);

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

~~Bad debt expense.~~~~Our consolidated bad debt expense increased 0.8%, or $0.1 million, to $10.0~~The Company’s net asset value decreased approximately $1.3 million for the ~~second quarter~~period from September 30, 2011 to December 31, 2011. The change in net assets was due to a $0.3 million positive impact related to operations, a $1.1 million reduction in the net realizable value of ~~fiscal 2011 from $9.9~~assets, and a $0.5 million ~~for~~decrease related to the ~~second quarter~~reduction in estimated net liquidation costs during the wind-down period.

The net realizable value of ~~fiscal 2010. As~~assets decline of $1.1 million was due to a ~~percentage~~$0.2 million reduction of ~~net revenue, bad debt expense increased slightly to 10.4% for~~ the ~~second quarter of fiscal 2011 as compared to 10.3% for the comparable period of fiscal 2010.~~

~~Our hospital division net accounts~~note receivable ~~primarily includes amounts due from patients and third-party payors and amounts due for third-party payor settlements. Third-party payor settlements include amounts~~balance due related to ~~prior filed cost reports~~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 not collectible and estimated future cost report filings. Our hospital division net accounts receivable due from patients and third-party payors, excluding amounts due for the settlement of cost reports, was $47.2 million at March 31, 2011 and $46.1 million, at March 31, 2010. Our third-party net accounts payable for the settlement of cost reports was $2.9 million anda $1.8 million asreduction in the net realizable value of ~~March 31, 2011 and 2010, respectively. Of this amount, $1.8 million and $2.8 million was related to prior fiscal year cost reports~~the Company’s investment in a partnership that owns a medical office building as ~~of March 31, 2011 and 2010, respectively.~~

We compute our allowance for doubtful accounts based on a liquidation percentage by hospital. This liquidation (or bad debt) percentage is based on a twelve month hindsight analysis computed on a monthly basis while considering any current trends or changes in payor mix that could impact historical collection percentages.

~~We reserve for the estimate of uncollectible self-pay accounts at the time the revenue is recognized. As~~ a result ~~an increase in self-pay admissions will increase the bad debt expense and the allowance for doubtful accounts most significantly in the period in which the service is rendered.~~

~~Our hospital division net patient accounts receivable outstanding by payor group excluding amounts due from third-party payors for the settlement~~ of ~~cost reports as of March 31, 2011 and 2010 was as follows:~~

Net Hospital Division Patient
Accounts Receivable Outstanding
(in thousands)
Payor Group March 31, 2011 March 31, 2010
Medicare $ 17,862 $ 16,145
Medicaid (1) 3,647 3,520
Self-pay (2) 5,586 4,962
Commercial & Other 20,122 21,438

Total $ 47,217 $ 46,065


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

~~(2)~~		Self-pay net accounts receivable includes patients registered as self-pay with no insurance or government program assistance (31.7% and 36.1% of total self-pay net accounts receivable outstanding at March 31, 2011 and 2010, respectively) and the self-pay portion due after insurance and government programs (68.3% and 63.9% of total self-pay net accounts receivable outstanding at March 31, 2011 and 2010, respectively).

~~The below table reflects the percentage of hospital division net patient accounts receivable, excluding amounts due for the settlement of cost reports, by aging group as of March 31, 2011:~~

Days Outstanding
As of March 31, 2011
Payor Group 0-30 31-60 61-120 121-150 151-180 +181 Total
Medicare 53.8 % 29.1 % 27.2 % 7.7 % 12.7 % 4.8 % 37.8 %
Medicaid (1) 5.3 % 8.6 % 12.2 % 19.9 % 13.2 % 8.5 % 7.7 %
Self-pay (2) 1.2 % 5.7 % 14.6 % 22.7 % 33.4 % 54.2 % 11.8 %
Commercial & Other 39.7 % 56.6 % 46.0 % 49.7 % 40.7 % 32.5 % 42.7 %

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


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

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

~~The below table reflects the percentage of hospital division net patient accounts receivable, excluding amounts due for the settlement of cost reports, by aging group as of March 31, 2010:~~

Days Outstanding
As of March 31, 2010
Payor Group 0-30 31-60 61-120 121-150 151-180 +181 Total
Medicare 54.7 % 17.8 % 17.3 % 5.7 % 3.8 % 2.7 % 35.6 %
Medicaid (1) 4.1 % 12.6 % 12.5 % 11.3 % 7.6 % 10.2 % 7.5 %
Self-pay (2) 2.8 % 8.6 % 13.4 % 19.2 % 17.2 % 53.6 % 10.8 %
Commercial & Other 38.4 % 61.0 % 56.8 % 63.8 % 71.4 % 33.5 % 46.1 %

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


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

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

For the quarter ended March 31, 2011, the hospital division provision for bad debts was 61.0% of hospital net patient revenue, compared to 56.1% in the prior year. Our days sales outstanding for our hospital division net accounts receivable, excluding amounts due from third-party payors related to the settlement of cost reports,recent market offers. These declines were ~~46 and 45 at March 31, 2011 and 2010, respectively.~~

~~Other operating expenses.~~~~Our consolidated other operating expenses increased 2.5%, or $0.5 million to $22.8 million for the second quarter of fiscal 2011 from $22.3 million for the second quarter of fiscal 2010.~~

Our total other operating expense increased $0.5 million for the second quarter of fiscal 2011 compared to fiscal 2010. The primary increases in operating expenses were increases in professional fees related to our strategic options process, purchased contract services and insurance expense, offset by reductions in net corporate and MedCath Partners personnel related expenses.

Our hospital division purchased services expense increased approximately $0.6 million at certain of our hospitals as we have entered into new arrangements with healthcare groups, such as anesthesiologist and emergency department physicians, to ensure coverage at these hospitals. This increase in expense is offset by the increase in our emergency department revenue for these facilities. Our insurance expense increased $0.7 million due to an increase in our medical malpractice claims paid and an increase in our coverage limit for directors and officer’s plan due to our strategic options process.

Our total corporate and our MedCath Partners personnel related expenses; including salaries, benefits, and training have declined approximately $2.6 million during the second quarter of fiscal 2011 compared to the same period of the prior year. This decline is the direct result of our strategic options process as we continue to reduce headcount for our corporate office and our MedCath Partners division as we sell our assets. This decline was offset by a $1.1 million increase in ~~bonus~~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 assets to provide information technology and business office support. Some of these services were extended beyond their original service end date. We also entered into a new transition services agreement during our first quarter of fiscal 2012 with the buyer of Harlingen Medical Center (“HMC”). We sold our equity interest in 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 ~~retention~~our outsourcing of information technology and ~~annual performance bonuses and a $1.2 million increase in outsourcing fees paid for our~~ central business office ~~and our information technology services.~~

We incurred approximately $1.3 million in professional fees during the second quarter of fiscal 2011 related to our strategic options process. These costs include legal, consulting and board fees. We began our strategic options process in March of last year and incurred $0.2 million of strategic options expenses during the second quarter of fiscal 2010. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown.

~~Depreciation expense.~~~~Depreciation expense decreased~~functions by $1.5 ~~million to $4.6 million for the second quarter of fiscal 2011 from $6.1 million for the second quarter of fiscal 2010.~~million. 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.

~~Impairment expense.~~Impairment expense increased $4.8 million to $19.5 million for the second quarter of fiscal 2011 from $14.7 million for the second quarter of fiscal 2010. During the second quarter of fiscal 2011, the Company recognized an impairment of property and equipment at two of its hospitals due to declines in operating performance as well as the uncertainty at those hospitals as a result of the Company’s strategic options process. During the second quarter of fiscal 2010, the Company recognized an impairment of property and equipment at one of its hospitals due to declines in operating performance as well as the ongoing review of strategic alternatives for the Company.

~~Interest expense.~~Interest expense decreased $0.1 million to $1.0 million for the second quarter of fiscal 2011 from $1.1 million for the second quarter of fiscal 2010. The decrease in interest expense is principally due to the reduction in amounts outstanding under the Company’s Senior Secured Credit Facility, partially offset by an increase in the amount of assets under capital leases. On May 9, 2011, the Company repaid the entire balance outstanding under the Company’s Senior Secured Credit Facility.

~~Gain on sale of equity interests.~~~~The gain on sale of equity interests of $0.2 million for the second quarter of fiscal 2011 is related to the sale of our interest in Central New Jersey Heart Services, LLC on January 1, 2011.~~

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

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

Equity in net earnings of unconsolidated affiliates decreased during the second quarter of fiscal 2011 to $1.3 million from $3.1 million for the same period of fiscal 2010. AHHSD and Southwest Arizona Heart and Vascular Center, LLC contributed $1.1 million and $1.0 million, respectively, of net earnings during the second quarter of fiscal 2010 and were disposed on October 1, 2010 and November 1, 2010, respectively, resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases due to the disposition of its interest in Central New Jersey Heart Services, LLC on January 1, 2011.

~~Income tax benefit.~~Income tax benefit was $(7.7) million for the second quarter of fiscal 2011 compared to $(5.6) million for the second quarter of fiscal 2010, which represents an effective tax rate of (46.4%) and (45.5%) for the respective periods. The second quarter fiscal 2011 and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests.

~~Loss from discontinued operations, net of taxes.~~Loss from discontinued operations, net of taxes decreased $0.4 million, net of taxes for the second quarter of fiscal 2011 from a loss of $1.9 million, net of taxes, for the comparable period of fiscal 2010. During the second quarter of fiscal 2010, the Company recognized an impairment of $5.2 million to property and equipment at one of its discontinued hospitals due to declines in operating performance as well as the receipt of a third party market offer that indicated impairment existed. Such impairment was partially offset by the operating activities of another of the Company’s discontinued hospitals. During the second quarter of fiscal 2011, the Company has had nominal operating activities related to its discontinued operations.

~~Net income attributable to noncontrolling interest.~~~~Noncontrolling interest share of earnings of consolidated subsidiaries increased to $3.2 million for the second quarter of fiscal 2011 from $2.5 million for the comparable period of fiscal 2010.~~

We recognize a disproportionate share of losses for certain of our entities. The increase in net income attributable to noncontrolling interest is the result of us absorbing more losses during the current period compared to the prior year. We expect earnings attributable to noncontrolling interests to fluctuate in future periods as we either recognize disproportionate losses and/or recoveries thereof through disproportionate profit recognition. For a more complete discussion of our accounting for noncontrolling interests, including the basis for disproportionate allocation accounting, see~~Critical Accounting Policiesin our Annual Report on Form 10-K for the fiscal year ended September 30, 2010.~~

~~Results of Operations~~

~~Six Months Ended March 31, 2011 Compared to Six Months Ended March 31, 2010~~

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

Six Months Ended March 31,
(in thousands except percentages)
Increase/
(Decrease) % of Net Revenue
2011 2010 % 2011 2010
Net revenue $ 186,063 $ 184,607 0.8 % 100.0 % 100.0 %
Operating expenses:
Personnel expense 66,313 64,786 2.4 % 35.6 % 35.1 %
Medical supplies expense 42,411 45,688 (7.2 )% 22.8 % 24.7 %
Bad debt expense 19,715 17,437 13.1 % 10.6 % 9.4 %
Other operating expenses 46,959 44,640 5.2 % 25.3 % 24.2 %
Pre-opening expenses — 866 (100.0 )% — 0.5 %
Depreciation 9,517 12,064 (21.1 )% 5.1 % 6.5 %
Impairment of long-lived assets 19,548 14,700 100.0 % 10.5 % 8.0 %
Loss on disposal of property, equipment and other assets 271 27 903.7 % 0.1 % 0.0 %

Loss from operations (18,671 ) (15,601 ) 19.7 % (10.0 )% (8.6 )%
Other income (expenses):
Interest expense (2,079 ) (1,999 ) (4.0 )% (1.0 )% (1.1 )%
Interest and other income 539 85 534.1 % 0.3 % 0.0 %
Gain on sale of unconsolidated affiliates 15,570 — N/M 8.4 % —
Loss on note receiveable — (1,507 ) (100.0 )% — (0.8 )%
Equity in net earnings of unconsolidated affiliates 1,860 4,608 (59.6 )% 1.0 % 2.4 %

Loss from continuing operations before income taxes (2,781 ) (14,414 ) (80.7 )% (1.5 )% (7.9 )%
Income tax benefit (3,213 ) (6,976 ) (53.9 )% (1.7 )% (3.8 )%

Income (loss) from continuing operations 432 (7,438 ) (105.8 )% 0.2 % (4.0 )%
Income (loss) from discontinued operations, net of taxes 37,727 (3,064 ) (1331.3 )% 20.2 % (1.7 )%

Net income (loss) 38,159 (10,502 ) (463.3 )% 20.5 % (5.7 )%
Less: Net income attributable to noncontrolling interest (14,615 ) (3,364 ) 334.5 % (7.9 )% (1.8 )%

Net income (loss) attributable to MedCath Corporation $ 23,544 $ (13,866 ) (269.8 )% 12.7 % (7.5 )%

Six Months Ended March 31,
2011 2010 % Change
Selected Operating Data (a):

Number of hospitals 5 5
Licensed beds (b) 421 421
Staffed and available beds (c) 380 380
Admissions (d) 9,343 9,404 (0.6 )%
Adjusted admissions (e) 14,074 13,745 2.4 %
Patient days (f) 35,085 35,362 (0.8 )%
Adjusted patient days (g) 53,194 51,905 2.5 %
Average length of stay (days) (h) 3.76 3.76 (2.1 )%
Occupancy (i) 50.7 % 51.1 %
Inpatients with a catheterization procedure (j) 3,732 3,888 (4.0 )%
Inpatient surgical procedures (k) 2,219 2,259 (1.8 )%
Hospital net revenue (in thousands except percentages) $ 181,614 $ 178,263 1.9 %


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

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

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

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

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

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

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

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

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

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

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

~~Net Revenue.~~Our consolidated net revenue increased 0.8%, or $1.5 million, to $186.1 million for the six months ended March 31, 2011 from $184.6 million for the six months ended March 31, 2010. Hospital Division net revenue increased 1.9%, or $3.4 million, for the first six months of fiscal 2011 compared to the same period of fiscal 2010.

Inpatient net revenue was 69.5% of the Hospital Division’s net patient revenue for the first six months of fiscal 2011 compared to approximately 71.2% for the same period of the prior year. Our total inpatient cases were down 0.8% and inpatient net revenue was flat for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. Outpatient net revenue increased 8.2% due to HMMC, our newest hospital which began operations during the first quarter of fiscal.

Net revenue for the first six months of fiscal 2011 included charity care deductions of $4.5 million compared to charity care deductions of $3.8 million for the first six months of fiscal 2010. The $0.7 million increase is the result of more uninsured patients applying and qualifying for charity care.

~~Personnel expense.~~~~Our consolidated personnel expense increased 2.4%, or $1.5 million, to $66.3 million for the six months ended March 31, 2011 from $64.8 million for the six months ended March 31, 2010.~~

The increase in personnel expense was primarily due to a $1.0 million increase in stock based compensation. As part of the strategic options process and the impact that certain related events may have on non-deductibility of executive compensation, the compensation committee of our Board of Directors waived the performance vesting criteria for certain executive management’s restricted stock sharescorporate level 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~~2012 offset by higher anticipated legal, board and professional fees related to the ~~shares that would have vested over time~~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 ~~performance criteria were met was recognized during the first quarter~~presented in our August 17, 2011 proxy filing. The net realizable value of ~~fiscal 2011. The shares subject to the waiver~~our assets under GAAP at December 31, 2011 does not take into consideration any estimated range of vesting criteria continue to maintain sell restrictions that will be lifted upon a change in control of the Company. In addition, management updated the estimate on the restricted share forfeiture rate since it is anticipatedpotential unknown contingencies. Accounting for contingencies under GAAP requires that the ~~rate of employee turnover~~contingency be probable and estimable in order to be accrued. However, based on our prior experience, we do expect that we will ~~decline as~~incur contingencies during our wind-down period that we continue to progress with our strategic options process. We also experienced a $0.9 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 decline in salaries and wages and related benefits as we continue to monitor costs to better align these costs with net revenues and as the result of a reduction in management positions within hospital division as we sell our hospital assets.

~~Medical supplies expense.~~~~Our consolidated medical supplies expense decreased 7.2%, or $3.3 million, to $42.4 million for the first six months of fiscal 2011 from $45.7 million for the first six months of fiscal 2010.~~

~~The decline in medical supplies expense is primarily~~cannot estimate at this time. Such contingencies may include any amounts due to $2.9 million in sales tax refunds at two of our hospitals. Absent the refunds, medical supplies expense decreased $0.4 million year over year due to a decline in procedures being performed that have higher supply costs, such as open heart and ICD procedures, during the first six months of fiscal 2011 compared to the same period of the prior year.

~~Bad debt expense.~~Our consolidated bad debt expense increased 13.1% to $19.7 million for the first six months of fiscal 2011 from $17.4 million for the first six months of fiscal 2010. As a percentage of net revenue, bad debt expense increased to 10.6% for the first six months of fiscal 2011 as compared to 9.4% for the comparable period of fiscal 2010. This increase is attributable to a $5.2 million increase in self-pay revenue for the first six months of fiscal 2011 compared to the same period of the prior year offset by improved collection on accounts receivable during fiscal 2011. Our days sales outstanding for the first six months of fiscal 2011 and fiscal 2010 were 48.

~~Other operating expenses.~~~~Our consolidated other operating expenses increased 5.2%, or $2.4 million, to $47.0 million for the first six months of fiscal 2011 from $44.6 million for the first six months of fiscal 2010.~~

Our corporate and MedCath Partners divisions have experienced a $2.9 million reduction in personnel expenses for salaries, benefits and training. However, this reduction was offset by a $1.3 million increase in bonus expense related to retention programs associated with our strategic options process and the expected attainment of performance goals, and a $1.5 million increase in costs incurred to outsource our central business office and information technology services.

Our legal and professional fees were $2.6 million higher for the first six months of fiscal 2010 compared to the first six months of fiscal 2009 due to the fees incurred related to our strategic options process. These costs include legal, consulting and board related fees. Our strategic options costs will continue to be material and we may incur material costs related to contingencies that are currently unknown.

~~Depreciation expense.~~Depreciation expense decreased $2.6 million to $9.5 million for the first six months of fiscal 2011 from $12.1 million for the first six months of fiscal 2010. The decrease in depreciation expense is primarily attributable to the decrease in fixed asset depreciable base due to impairments on long-lived assets recorded in the second and fourth quarters of fiscal 2010.

~~Impairment expense.~~Impairment expense increased $4.8 million to $19.5 million for the first six months of fiscal 2011 from $14.7 million for the first six months of fiscal 2010. During the second quarter of fiscal 2011, the Company recognized an impairment of property and equipment at two of its hospitals due to declines in operating performance as well as the uncertainty at those hospitalscreditors as a result of the ~~Company’s strategic options process. During the second quarter~~DGCL process we will follow once we file for articles of ~~fiscal 2010, the Company recognized an impairment of property and equipment at one of its hospitals~~dissolution, any amounts due to ~~declines~~the 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 operations during the wind-down period, including legal claims. We previously estimated a range of potential unknown contingencies in ~~operating performance~~our proxy filing filed with the Securities Exchange Commission on August 17, 2011 to be between $5.2 million to $19.8 million not including any contingency, which may be material, that may arise as ~~well as~~a result of the ~~ongoing review~~DOJ’s investigation related to the implantation of ~~strategic alternatives~~ICD’s, or $3.3 million to $13.0 million, net of income tax, ($0.16 to $0.64 per common share). In addition, any contingency that may arise, if any, related to the Department of Justice's investigation related to the implantation of ICD’s has also not been accrued when determining the net realizable value of our assets available for ~~the Company.~~

distribution to our stockholders.

~~Interest expense.~~Impact of Unrealized Tax Attributes on Net Asset Realizable Value —~~Interest expense increased $0.1~~The total assets available for stockholder distribution does not take into consideration $8.0 million, or ~~4.0%~~$0.39 per common share, in tax attributes that are not recognizable under GAAP. These attributes may be recognizable once we have a definitive plan in place to ~~$2.1 million for~~dissolve certain of our partnerships.

Liquidity and Capital Resources

As a result of the ~~first six months~~adoption of ~~fiscal 2011 from $2.0 million for the first six months~~a formal Plan of ~~fiscal 2010. The increase in interest expense is primarily attributable~~Dissolution, our activities are now limited to operating Bakersfield Heart Hospital, fulfilling transition service obligations to the ~~overall reduction~~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 the corporate division functions, managing our remaining hospital, Bakersfield Heart Hospital, until its value is realized, realizing the value of corporate held assets and paying the creditors of previously sold hospitals in ~~our outstanding debt~~which we retained net working capital. The Company believes the following table accurately describes the costs and ~~interest rates~~obligations that are expected to be paid over the period of liquidation of the Company.

Based on our outstanding debt. 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. Such increases were partially offset by a reduction in amounts outstanding under the Company’s ~~Senior Secured Credit Facility. On May 9,~~net asset balances as of December 31, 2011, the Company ~~repaid~~believes proceeds from the ~~entire balance outstanding under the Company’s Senior Secured Credit Facility.~~

~~Gain on sale~~liquidation of ~~equity interests.~~The gain on sale of equity interests of $15.6 million for the first six months of fiscal 2011 is related to the sale of our interest in Central New Jersey Heart Services, LLC, AHHSD partially offset by a nominal loss on the sale of the Company’s interest in Southwest Arizona Heart and Vascular Center, LLC. Such sales occurred on January 1, 2011, October 1, 2010 and November 1, 2010, respectively.

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

Equity in net earnings of unconsolidated affiliates decreased during the first six months of fiscal 2011 to $1.9 million from $4.6 million for the same period of fiscal 2010. AHHSD and Southwest Arizona Heart and Vascular Center, LLC contributed $2.1 million and $1.3 million, respectively, of net earnings during the first six months of fiscal 2010 and were disposed on October 1, 2010 and November 1, 2010, respectively, resulting in the noted decrease in such equity in net earnings. The Company expects continued decreases due to the disposition of its interest in Central New Jersey Heart Services LLC on January 1, 2011.

~~Income tax benefit.~~Income tax benefit was $(3.2) million for the first six months of fiscal 2011 compared to $(7.0) million for the first six months of fiscal 2010, which represents an effective tax rate of (115.5%) and (48.4%) for the respective periods. The first six months of fiscal 2011 and 2010 effective rate is above our federal statutory rate of 35.0% primarily due to the effect of income allocable to our noncontrolling interests.

~~Income (loss) from discontinued operations, net of taxes.~~Income (loss) from discontinued operations, net of taxes increased to an income of $37.7 million, net of taxes for the first six months of fiscal 2011 from a loss of $(3.1) million, net of taxes, for the comparable period of fiscal 2010. During the first six months of fiscal 2011, the Company recognized pre-tax gains upon disposition of assets of discontinued operations of $69.9 million, partially offset by an $11.1 million loss on early termination of debt at one of the facilities. The significant components of the gains recognized are a $35.7 million gain and a $34.3 million gain on the sale of the assets of HHA and TexSan Heart Hospital, respectively. During the first six months of fiscal 2010, the Company recognized an impairment of $5.2 million to property and equipment at one of its discontinued hospitals due to declines in operating performance as well as the receipt of an independent third party market offer that indicated that impairment existed. Such impairment was partially offset by the operating activities of another of the Company’s discontinued hospitals. During the first six months of fiscal 2011, the Company has had nominal operating activities related to its discontinued operations.

~~Net income attributable to noncontrolling interest.~~~~Noncontrolling interest share of earnings of consolidated subsidiaries increased to $14.6 million for the first six months of fiscal 2010 from $3.4 million for the comparable period of fiscal 2010.~~

Net income attributable to noncontrolling interest increased $7.1 million and $2.2 million due to the noncontrolling shareholders’ interest in the gains recognized in fiscal 2011 upon the disposition of the majority of the assets of HHA and TexSan Heart Hospital, respectively. In addition, the Company recognized an increase of $0.5 million due to the losses recognized at AzHH in the first six months of fiscal 2010 and 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 discussion of our accounting 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.~~

~~Liquidity and Capital Resources~~

Cash used in continuing operations from operating activities was $5.5 million for the first six months of fiscal 2011 compared to cash provided by continuing operations operating activities of $11.7 million for the comparable period of fiscal 2010. The decrease of $17.2 million in cash provided by continuing operations from operating activities was due to an overall $6.4 million decrease in cash generated from continuing. Cash from continuing operations was further decreased by an increase in payments of $9.7 million related to the timing of payments associated with accounts payable, a decrease in accounts receivable collections of $2.3 million and a $0.5 million increase in cash payments related to the timing of prepaid obligations, such as yearly insurance premiums. These increases in cash payments were offset by a $1.6 million reduction in cash payments associated with the purchases of and cost of medical supplies.

Our investing activities from continuing operations provided net cash of $32.1 million for the first six months of fiscal 2011 compared to a use of cash of $13.1 million for the comparable period of fiscal 2010. Such increase was primarily due to the net proceeds of $32.5 million for the disposition of the Company’s interest in Central New Jersey Heart Services, LLC, AHHSD and Southwest Arizona Heart and Vascular LLC during the first six months of fiscal 2011. In addition, the Company experienced a decrease of $12.8 million in cash paid for property and equipment in the first six months of fiscal 2011 compared to the same period in fiscal 2010. This decrease is primarily related to the capital expenditures in fiscal 2010 related to the development of HMMC, which opened in October 2009.

Our financing activities from continuing operations used net cash of $45.3 million for the first six months of fiscal 2011 compared to $16.7 million for the comparable period of fiscal 2010. The increase was due to the payments on our Amended Credit Facility during the first six months of fiscal 2011, including $26.8 million of prepayments during the second quarter of fiscal 2011.

~~Capital Expenditures.~~Cash paid for property and equipment was $0.8 million and $13.6 million for the first six months of fiscal years 2011 and 2010, respectively. Of the $13.6 million of cash paid for property and equipment during the first six months of fiscal 2010, $7.5 million related to HMMC, which opened in October 2009.

~~Obligations and Availability of Financing.~~At March 31, 2011, we had $38.0 million of outstanding long-term debt and obligations under capital leases, of which $32.8 million was classified as current. Our Term Loan under our Amended Credit Facility had an outstanding amount of $30.2 million. The remaining outstanding obligation under capital leases of $7.8 million was due to various lenders to our hospitals. No amounts were outstanding under our Revolver. The maximum availability under our Revolver was $25.9 million, less the amount of outstanding letters of credit totaling $1.7 million, as of March 31, 2011. On May 9, 2011, the Company repaid the entire balance outstanding under the Amended Credit Facility and terminated the facility on that date.

Covenants related to our long-term debt restrict the payment of dividends and require the maintenance of specific financial ratios and amounts and periodic financial reporting. At March 31, 2011 and September 30, 2010, the Company was in compliance with its debt covenants.

At March 31, 2011, we guaranteed either all or a portion of the obligations of certain of our subsidiary hospitals for equipment and other notes payable. We provide these guarantees in accordance with the related hospital operating agreements, and we receive a fee for providing these guarantees from either the hospitals or the physician investors.

~~We believe that cash flows from our recent asset sales and our cash on hand from operations~~ will be sufficient to ~~finance~~provide payment in full to its creditors; however, there can be no assurances this will be the case. Payments are estimated as follows:


	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

The net assets available for distribution does not include expenses related to events or claims that we cannot reasonably quantity or predict and which may be material, including the cost and expenses related to the ICD Investigation.

These projected payments are based on significant estimates and judgments. The total amount available for stockholder distribution does not take into consideration any estimate of liabilities arising from the ICD Investigation or other unknown or unanticipated liabilities that may arise. Through the liquidation period, if the Company is able to generate cash proceeds in excess of what is needed to satisfy all the Company’s obligations, the Company will distribute any proceeds to stockholders. The actual amount and timing of future liquidating distributions, if any, to stockholders is dependent upon the resolution of all open items and periods with taxing authorities; the ultimate settlement amounts of the Company’s liabilities and obligations; the resolution of the Company’s investigation by the DOJ regarding ICD implantation; and actual costs incurred in connection with carrying out the Company’s Plan of Dissolution, including administrative costs during the liquidation period; and other factors. Included in the total assets of $243.5 million as of December 31, 2011, was $150.0 million of cash and cash equivalents. The aggregate amount of future distributions to stockholders is currently presented under GAAP as approximately $9.33 per share of common stock based on net assets as of December 31, 2011; however, the actual amount of cash remaining for distribution to stockholders following completion of dissolution could vary significantly.

The above does not take into consideration any estimate of liabilities arising from the ICD Investigation or other unknown or unanticipated liabilities which may arise during the wind-down period. However, based on our ~~strategic plans, capital expenditures~~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 the DGCL process we will follow once we file for articles of dissolution, any amounts due to the government for unknown reimbursement claims, such as RAC audits, cost report settlements, and any other unknown contingent liability that may arise during the normal course of operations during the wind-down period, including legal claims. We previously estimated a range of potential unknown contingencies in our ~~working capital requirements~~proxy filing filed with the Securities Exchange Commission on August 17, 2011 to be between $5.2 million to $19.8 million not including any contingency that may arise as a result of the DOJ’s investigation related to the implantation of ICD’s, or $3.3 million to $13.0 million, net of income tax (approximately $0.16 to $0.64 per common share). In addition, any contingency that may arise and which may be material, related to the DOJ’s investigation related to the implantation of ICD’s has also not been taken into consideration when determining the net realizable value of our assets available for ~~the next 12~~distribution to ~~18 months.~~

our stockholders.
Impact of Unrealized Tax Attributes on Net Asset Realizable Value —The total assets available for stockholder distribution does not take into consideration $8.0 million, or $0.39 per common share, in tax attributes that are not recognizable under GAAP. These attributes may be recognizable once we have a definitive plan in place to dissolve certain of our partnerships.

Intercompany Financing ~~Arrangements~~Arrangements..~~We provide~~Historically, we had provided secured real estate, equipment and working capital financings to our ~~majority-owned~~ hospitals. ~~Each~~As of December 31, 2011 and September 30, 2011, we had $31.0 million of inter-company working capital and real estate notes due from our remaining hospital. The intercompany real estate loan is separately documented and secured with a lien on the borrowing hospital’s real estate, building and equipment and certain other ~~assets. Each intercompany real estate loan typically~~assets and matures in ~~7 to 10~~three years and accrues interest at variable rates based on LIBOR plus an applicable margin or a fixed rate similar to terms commercially available.

Each intercompany equipment loan is separately documented and secured with a lien on the borrowing hospital’s equipment and certain other assets. Amounts borrowed under the intercompany equipment loans are payable in monthly installments of principal and interest over terms that range from 5 to 7 years. The intercompany equipment loans accrue interest at rates ranging from 5.8% to 8.43%. The weighted average interest rate for the intercompany equipment loans at March 31, 2011 was 7.30%.

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

We also ~~use~~used intercompany financing arrangements to provide cash support to individual hospitals for their working capital and other corporate needs. We provide these working capital loans pursuant to the terms of the operating agreements between our physician and hospital investor partners and us at each of our hospitals. These intercompany loans are evidenced by promissory notes that establish borrowing limits and provide for a market rate of interest to be paid to us on outstanding balances. These intercompany loans are subordinate to ~~each~~our hospital’s mortgage ~~and equipment~~ debt outstanding, but are senior to our equity interests and our partners’ equity interests in the hospital venture and are secured, subject to the prior rights of the senior lenders, in each instance by a pledge of certain of the borrowing hospital’s assets.

Because these intercompany notes receivable and related interest income are eliminated with the corresponding notes payable and interest expense in the process of preparing our consolidated financial statements the amounts outstanding under these notes do not appear in our consolidated financial statements or accompanying notes. Information about the aggregate amount of these notes outstanding from time to time may be helpful, however, in understanding the amount of our total investment in our hospitals. In addition, we believe investors and others will benefit from a greater understanding of the significance of the priority rights we have under these intercompany notes receivable to distributions of cash by our hospitals as funds are generated from future operations, a potential sale of a hospital, or other sources. Because these notes receivable are senior to the equity interests of MedCath and our partners in each hospital, in the event of a sale of a hospital, the hospital would be required first to pay to us any balance outstanding under its intercompany notes prior to distributing any of the net proceeds of the sale to any of the hospital’s equity investors as a return on their investment based on their pro-rata ownership interests. Also, asappropriate payments to us to amortize principal balances outstanding and to pay interest due under these notes are generally made to us from a hospital's available cash flows prior to any pro-rata distributions of a hospital’s earnings to the equity investors in the hospitals.

Results of Operations — Going Concern Basis

Three Months Ended December 31, 2010

Net Revenue.Our consolidated net revenue totaled $38.8 million for the three months ended December 31, 2010. This revenue was comprised of the operations of Bakersfield Heart Hospital, Hualapai Mountain Medical Center (“HMMC”) and Louisiana Heart Hospital. Subsequent to the adoption of liquidation basis of accounting on September 22, 2011, the Company disposed of its interest in HMMC and Louisiana Heart Hospital. Net revenue for the first quarter of fiscal 2011 included charity care deductions of $0.4 million.

Personnel expense. Personnel expense totaled $17.7 million during the first quarter of fiscal 2011. Included in personnel expense is $1.9 million stock based compensation. As part of the strategic options process and the impact that certain related events may have on non-deductibility of executive compensation, the compensation committee of our ~~intercompany financing and cash management structure, we sweep cash from individual hospitals as amounts are available in excess~~Board of Directors waived the ~~individual hospital’s working capital needs. These funds are advanced pursuant to cash management agreements with~~performance vesting criteria for certain executive management’s restricted stock shares during the ~~individual hospital that establish the terms~~first quarter of ~~the advances and provide for a rate of interest to be paid consistent with the market rate earned by us on the investment of its funds. These cash advances are due back~~fiscal 2011, therefore, all future stock based compensation related to the ~~individual hospital on demand and are subordinate~~shares that would have vested over time as performance criteria were met was recognized during the first quarter of fiscal 2011.

Medical supplies expense. Medical supplies expense totaled $8.1 million for the first quarter of fiscal 2011.

Bad debt expense. Bad debt expense totaled $5.6 million for the first quarter of fiscal 2011 principally due to ~~our equity investment in~~ the ~~hospital venture.~~

~~The estimated~~large volume of self-pay net ~~realizable value~~revenue for the first quarter of ~~intercompany notes outstanding with the Company’s subsidiaries in continuing operations was $123.0 million and $153.2 million as of March 31, 2011 and September 30, 2010, respectively.~~

~~The net realizable value of our intercompany notes outstanding includes a~~fiscal 2011. We reserve for the ~~amount~~estimated bad debt on self-pay net revenue at the time of recognition based on our historical collection experience related to self-pay patients.

Other operating expenses.Other operating expenses totaled $14.1 million for the first quarter of fiscal 2011 and included $2.5 million related to our strategic options process along with normal operating expenses such as purchased contract services, corporate salaries and wages, insurance expense and repairs and maintenance.

Depreciation expense.Depreciation expense totaled $2.2 million for the first quarter of fiscal 2011.

Interest expense. Interest expense totaled $1.0 million for the first quarter of fiscal 2011 and principally represented amounts outstanding under the Company’s former debt facility, which was paid in full and terminated in May 2011.

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”). This sale occurred on October 1, 2010.

Equity in net earnings of unconsolidated affiliates.The net earnings of unconsolidated affiliates are comprised of our share of earnings in unconsolidated hospitals, a hospital realty investment and a partnership that owns a medical office building located in Austin, Texas.

Equity in net earnings of unconsolidated affiliates totaled $0.3 million during the first quarter of fiscal 2011, which principally represents the Company’s share of the ~~impairment charges we have recorded~~earnings of Harlingen Medical Center and HMC Realty, LLC. The Company disposed of its interests in these two entities in November 2011.

Net income attributable to noncontrolling interest. Noncontrolling interest share of earnings of consolidated subsidiaries totaled $11.4 million for ~~facilities that have~~the first quarter of fiscal 2011.

Income tax expense. Income tax expense totaled $2.1 million for the first quarter of fiscal 2011, which represents an ~~intercompany amount outstanding that exceeds~~effective tax rate of 36.8%. The first quarter fiscal 2011 effective rate is above our federal statutory rate of 35.0% primarily due to the ~~carrying value~~effect of ~~the related assets that serve as collateral on the notes. Therefore,~~income allocable to our ~~total net realizable value of our intercompany note outstanding has been reduced by $82.6 million, the total amount of impairment charge recorded for assets in continuing operations.~~

noncontrolling interests.

~~The estimated net realizable value of intercompany notes related to continuing operations at March 31, 2011 is outlined below:~~

~~Estimated Net Realizable Value of Intercompany Notes Related to Continuing~~
~~Operations at March 31, 2011~~

(in thousands)
Heart Hospital of New Mexico and Arkansas Heart Hospital (1) $ 46,200
Bakersfield Heart Hospital 32,144
Hualapai Mountain Medical Center (2) 22,000
Louisiana Medical Center and Heart Hospital (2) 22,700

Continuing Operations $ 123,044


~~(1)~~		Heart Hospital of New Mexico and Arkansas Heart Hospital were included in continuing operations at March 31, 2011. However, the Company entered into agreements in May 2011 to dispose of its interests in these entities, subject to shareholder approval. See Note 15.

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

~~Retained Obligations Subsequent to Disposition~~.~~Included in~~Income from discontinued operations, ~~are certain liabilities that~~net of taxes.Income from discontinued operations, net of taxes totaled $44.8 million, net of taxes for the first quarter of fiscal 2011. During the first quarter of fiscal 2011, the Company ~~has retained upon the disposition of the related entity. As the Company’s hospitals are organized as partnerships,~~recognized pre-tax gains upon disposition of ~~the related~~assets of discontinued 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~~$69.9 million, partially offset by an $11.1 million loss on early termination of debt at one of the ~~respective tax filings~~facilities. The significant components of the ~~partnership. The partnerships~~gains recognized are ~~also responsible for any unknown liabilities that may arise. The Company has reported all known obligations in its consolidated balance sheets as of March 31, 2011~~a $35.7 million gain and ~~September 30, 2010. However, as~~a $34.3 million gain on the ~~ultimate resolution~~sale of the ~~outstanding payables~~assets of Heart Hospital of Austin and ~~obligations may take in excess of one year, our estimates may prove incorrect and result in the Company paying amounts in excess of those recorded at the respective balance sheet date.~~

~~Retained Cash Balance.~~At March 31, 2011, the Company had $119.7 million in cash related to continuing operations and $42.3 million in cash related to discontinued operations. As of March 31, 2011, the Company’s estimate of total potential cash distributions to the Company from discontinued operations is $25.0 million after taking into account distributions to minority owners, the liquidation of all assets and the settlement of all known liabilities, but does not take into account any unknown contingent liabilities related to the discontinued operations. The estimate of total cash distributions to the Company may change as it updates its estimates. There can be no assurance when the distributions to the Company from discontinued operations may take place, but it may be over an extended period of time. Any cash retained will be used to settle outstanding debt, which is due in full in November, 2011.

TexSan Heart Hospital, respectively.

Disclosure About Critical Accounting Policies

Our accounting policies are disclosed in our Annual Report on Form 10-K for the year ended September 30, ~~2010.~~2011. During the first ~~six~~three months of fiscal ~~2011~~2012 we adopted a new accounting policy as discussed in Note 23 —Recent Accounting Pronouncementsto our consolidated financial statements. The adoption of this new accounting policy did not have a material impact on our consolidated financial statements.

Forward-Looking Statements

Some of the statements and matters discussed in this report, such as the payment of distributions to stockholders, and in exhibits to this report constitute forward-looking ~~statements, including those relating to estimated distributions to the Company, resolution of outstanding payables and obligations, amongst others.~~statements. Words such as “expects,” “anticipates,” “approximates,” “believes,” “estimates,” “intends” and “hopes” and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that we will achieve our goals. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report and its exhibits might not occur. Our forward-looking statements speak only as of the date of this report or the date they were otherwise made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We urge you to review carefully all of the information in this report and our other filings with the SEC, including the discussion of risk factors inItem 1A. Risk Factorsin this report and our Annual Report on Form 10-K for the year ended September 30, ~~2010,~~2011, before making an investment decision with respect to our equity securities. A copy of this report, including exhibits, is available on the internet site of the SEC athttp://www.sec.govor through our website athttp://www.medcath.com.

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We maintain a policy for managing risk related to exposure to variability in interest rates, commodity prices, and other relevant market rates and prices which includes considering entering into derivative instruments (freestanding derivatives), or contracts or instruments containing features or terms that behave in a manner similar to derivative instruments (embedded derivatives) in order to mitigate our risks. In addition, we may be required to hedge some or all of our market risk exposure, especially to interest rates, by creditors who provide debt funding to us. The Company disposed of its minority interest in a hospital that maintained a cash flow hedge on October 1, 2010. As a result, the Company does not have outstanding any derivatives at March 31, 2011. There was no material change in our policy for managing risk related to variability in interest rates, commodity prices, other relevant market rates and prices during the first six months of fiscal 2011. See Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for further discussions about market risk.

~~Interest Rate Risk~~

Our Amended Credit Facility borrowings expose us to risks caused by fluctuations in the underlying interest rates. The total outstanding balance of our Credit Facility was $30.2 million at March 31, 2011. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $0.2 million during the six month period ended March 31, 2011.

~~Item 4. Controls and Procedures~~

Item 4.

Controls and Procedures

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

PART II. OTHER INFORMATION

~~Item 1. Legal Proceedings~~

Item 1.

Legal Proceedings

We are occasionally involved in legal proceedings and other claims arising out of our operations in the normal course of business. See Note 76 —Contingencies and Commitmentsto the consolidated financial statements included in this report.

~~Item 1A. Risk Factors~~

Item 1A.

Risk Factors

Information concerning certain risks and uncertainties appears under the heading “Forward-Looking Statements” in Part I, Item 2 of this report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, ~~2010.~~2011. You should carefully consider these risks and uncertainties before making an investment decision with respect to our securities. Such risks and uncertainties could materially adversely affect our business, financial condition or operating results.

During the period covered by this report, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, ~~2010~~2011 or filings subsequently made with the Securities and Exchange Commission.

~~Item 6. Exhibits~~

Item 6.

Exhibits


Exhibit No.		Description
~~Exhibit No.~~10.1		~~Description~~Equity Purchase Agreement by and between Prime Healthcare Services, Inc. and Harlingen Partnership Holdings, Inc., HMC Management Company, LLC and Harlingen Hospital Management, Inc. dated as of November 30, 2011.(1)

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

(1)	Incorporated by reference from the Company’s Current Report on Form 8-K filed December 13, 2011.

SIGNATURES

~~SIGNATURES~~

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



	MEDCATH CORPORATION

Dated: ~~May 10, 2011~~	~~By:~~	~~/s/ O. EDWIN FRENCH~~
February 9, 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)

INDEX TO EXHIBITS


Exhibit No.		Description
10.1

~~INDEX TO EXHIBITS~~

	Equity Purchase Agreement by and between Prime Healthcare Services, Inc. and Harlingen Partnership Holdings, Inc., HMC Management Company, LLC and Harlingen Hospital Management, Inc. dated as of November 30, 2011.(1)
~~Exhibit No.~~		~~Description~~

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

(1)	Incorporated by reference from the Company’s Current Report on Form 8-K filed December 13, 2011.


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


Large accelerated filer o¨	Accelerated filer þ	Non-accelerated filer o¨		Smaller reporting company ¨
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~ o


	Page

PART I. FINANCIAL INFORMATION		1

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

Consolidated ~~Balance Sheets~~Statements of Net Assets in Liquidation as of ~~March~~December 31, 2011 and September 30, ~~2010~~2011		13

Consolidated ~~Statements~~Statement of Changes in Net Assets in Liquidation for the Three Months Ended December 31, 2011		4

Consolidated Statement of Operations for the Three ~~and Six~~ Months Ended ~~March~~December 31, ~~2011 and~~ 2010		25
~~Consolidated Statement of Stockholders’ Equity for the Six Months Ended March 31, 2011~~			3
Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~March~~December 31, ~~2011 and~~ 2010		46

Notes to Unaudited Consolidated Financial Statements		57

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2115

Item 3. Quantitative and Qualitative Disclosures About Market Risk		3421

Item 4. Controls and Procedures		3421

PART II. OTHER INFORMATION		3421

Item 1. Legal Proceedings		3421

Item 1A. Risk Factors		3421

Item 6. Exhibits		3422

SIGNATURES		3522
~~EX-31.1~~
~~EX-31.2~~EX-31.1
~~EX-32.1~~
EX-31.2

EX-32.1

EX-32.2


	March 31,			September 30,
	2011			2010

Current assets:
Cash and cash equivalents	$	119,735		$	33,141
Accounts receivable, net		49,748			43,811
Income tax receivable		—			6,188
Medical supplies		10,373			10,550
Deferred income tax assets		8,500			13,247
Prepaid expenses and other current assets		12,949			13,453
Current assets of discontinued operations		46,619			47,920

Total current assets		247,924			168,310
Property and equipment, net		153,469			182,222
Other assets		18,484			24,716
Non-current assets of discontinued operations		1,152			119,290

Total assets	$	421,029		$	494,538


Current liabilities:
Accounts payable	$	16,633		$	15,716
Income tax payable		3,205			—
Accrued compensation and benefits		14,775			16,418
Other accrued liabilities		15,503			16,663
Current portion of long-term debt and obligations under capital leases		32,793			16,672
Current liabilities of discontinued operations		14,174			35,044

Total current liabilities		97,083			100,513
Long-term debt		—			52,500
Obligations under capital leases		5,191			6,500
Other long-term obligations		2,804			5,053
Long-term liabilities of discontinued operations		—			35,968

Total liabilities		105,078			200,534

Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest		7,356			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; 22,281,828 issued and 20,327,467 outstanding at March 31, 2011 22,423,666 issued and 20,469,305 outstanding at September 30, 2010		216			216
Paid-in capital		458,573			457,725
Accumulated deficit		(116,247	)		(139,791	)
Accumulated other comprehensive loss		—			(444	)
Treasury stock, at cost; 1,954,361 shares at March 31, 2011 and September 30, 2010		(44,797	)		(44,797	)

Total MedCath Corporation stockholders’ equity		297,745			272,909
Noncontrolling interest		10,850			9,561

Total equity		308,595			282,470

Total liabilities and equity	$	421,029		$	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 March 31,						Six Months Ended March 31,
	2011			2010			2011			2010

Net revenue	$	97,163		$	96,777		$	186,063		$	184,607
Operating expenses:
Personnel expense		33,859			33,150			66,313			64,786
Medical supplies expense		23,189			23,581			42,411			45,688
Bad debt expense		10,006			9,931			19,715			17,437
Other operating expenses		22,843			22,296			46,959			44,640
Pre-opening expenses		—			—			—			866
Depreciation		4,630			6,124			9,517			12,064
Impairment of long-lived assets		19,548			14,700			19,548			14,700
Loss (gain) on disposal of property, equipment and other assets		178			(69	)		271			27

Total operating expenses		114,253			109,713			204,734			200,208

Loss from operations		(17,090	)		(12,936	)		(18,671	)		(15,601	)
Other income (expenses):
Interest expense		(997	)		(1,054	)		(2,079	)		(1,999	)
Interest and other income		50			15			539			85
Gain on sale of unconsolidated affiliates		179			—			15,570			—
Loss on note receiveable		—			(1,507	)		—			(1,507	)
Equity in net earnings of unconsolidated affiliates		1,258			3,092			1,860			4,608

Total other income (expense), net		490			546			15,890			1,187

Loss from continuing operations before income taxes		(16,600	)		(12,390	)		(2,781	)		(14,414	)
Income tax benefit		(7,695	)		(5,639	)		(3,213	)		(6,976	)

(Loss) income from continuing operations		(8,905	)		(6,751	)		432			(7,438	)
(Loss) income from discontinued operations, net of taxes		(1,401	)		(1,934	)		37,727			(3,064	)

Net (loss) income		(10,306	)		(8,685	)		38,159			(10,502	)
Less: Net income attributable to noncontrolling interest		(3,189	)		(2,524	)		(14,615	)		(3,364	)

Net (loss) income attributable to MedCath Corporation	$	(13,495	)	$	(11,209	)	$	23,544		$	(13,866	)


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(12,341	)	$	(8,970	)	$	(5,179	)	$	(10,872	)
(Loss) income from discontinued operations, net of taxes		(1,154	)		(2,239	)		28,723			(2,994	)

Net (loss) income	$	(13,495	)	$	(11,209	)	$	23,544		$	(13,866	)


(Loss) earnings per share, basic
Loss from continuing operations attributable to MedCath Corporation common stockholders	$	(0.61	)	$	(0.46	)	$	(0.26	)	$	(0.55	)
(Loss) income from discontinued operations attributable to MedCath Corporation common stockholders		(0.06	)		(0.11	)		1.43			(0.15	)

(Loss) earnings per share, basic	$	(0.67	)	$	(0.57	)	$	1.17		$	(0.70	)


(Loss) earnings per share, diluted
Loss from continuing operations attributable to MedCath Corporation common stockholders	$	(0.61	)	$	(0.46	)	$	(0.26	)	$	(0.55	)
(Loss) income from discontinued operations attributable to MedCath Corporation common stockholders		(0.06	)		(0.11	)		1.43			(0.15	)

(Loss) earnings per share, diluted	$	(0.67	)	$	(0.57	)	$	1.17		$	(0.70	)


Weighted average number of shares, basic		20,208			19,829			20,075			19,786
Dilutive effect of stock options and restricted stock		—			—			6			—

Weighted average number of shares, diluted		20,208			19,829			20,081			19,786


	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
Stock awards, including cancelations and income tax benefit		24			—		2,854			—			—			—		—			—			2,854			—
Tax withholdings for vested restricted stock awards		(166	)		—		(2,006	)		—			—			—		—			—			(2,006	)		—
Distributions to noncontrolling interest		—			—		—			—			—			—		—			(8,293	)		(8,293	)		(3,560	)
Other transactions impacting noncontrolling interest		—			—		—			—			—			—		—			18			18			31
Exercise of call of noncontrolling interest		—			—		—			—			—			—		—			—			—			(5,700	)
Comprehensive loss:
Net income		—			—		—			23,544			—			—		—			9,564			33,108			5,051
Reclassification of amounts included in net income, net of tax benefit (*)		—			—		—			—			444			—		—			—			444			—

Total comprehensive loss																								33,552			5,051

Balance, March 31, 2011		22,282		$	216	$	458,573		$	(116,247	)	$	—			1,954	$	(44,797	)	$	10,850		$	308,595		$	7,356


~~(*)~~		~~Tax expense was $286 for the six months ended March 31, 2011.~~


	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
	March 31, 2011					March 31, 2010
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		913,812		$	21.89		986,637		$	22.23

Cancelled		(59,000	)		22.27		(11,000	)		29.49


Outstanding stock options, end of period		854,812		$	21.86		975,637		$	22.14


	For the Six Months Ended
	March 31, 2011					March 31, 2010
				Weighted-					Weighted-
	Number of			Average		Number of			Average
	Stock Options			Exercise Price		Stock Options			Exercise Price
Outstanding stock options, beginning of period		932,137		$	21.89		1,027,387		$	22.25

Cancelled		(77,325	)		22.16		(51,750	)		24.33


Outstanding stock options, end of period		854,812		$	21.86		975,637		$	22.14


	Three Months Ended March 31,						Six Months Ended March 31,
Division	2011			2010			2011			2010
Hospital		97.8	%		97.0	%		97.6	%		96.6	%
MedCath Partners		2.1	%		2.9	%		2.3	%		3.3	%
Corporate and other		0.1	%		0.1	%		0.1	%		0.1	%

Net Revenue		100.0	%		100.0	%		100.0	%		100.0	%


	Consolidated						Consolidated
	Three Months Ended March 31,						Six Months Ended March 31,
Payor	2011			2010			2011			2010
Medicare		51.1	%		50.1	%		52.3	%		52.1	%
Medicaid		3.3	%		3.8	%		4.0	%		3.8	%
Commercial and other, including self-pay		45.6	%		46.1	%		43.7	%		44.1	%

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


	Three Months Ended March 31,
	(in thousands except percentages)
							Increase/
							(Decrease)			% of Net Revenue
	2011			2010			%			2011			2010
Net revenue	$	97,163		$	96,777			0.4	%		100.0	%		100.0	%
Operating expenses:
Personnel expense		33,859			33,150			2.1	%		34.8	%		34.3	%
Medical supplies expense		23,189			23,581			(1.7	)%		23.9	%		24.4	%
Bad debt expense		10,006			9,931			0.8	%		10.4	%		10.3	%
Other operating expenses		22,843			22,296			2.5	%		23.5	%		23.0	%
Depreciation		4,630			6,124			(24.4	)%		4.8	%		6.2	%
Impairment of long-lived assets		19,548			14,700			100.0	%		20.1	%		15.2	%
Loss (gain) on disposal of property, equipment and other assets		178			(69	)		(358.0	)%		—			(0.1	)%

Loss from operations		(17,090	)		(12,936	)		32.1	%		(17.7	)%		(13.4	)%
Other income (expenses):
Interest expense		(997	)		(1,054	)		5.4	%		(0.9	)%		(1.1	)%
Interest and other income		50			15			233.3	%		0.1	%		0.0	%
Gain on sale of unconsolidated affiliates		179			—			N/M			0.2	%		—
Loss on note receiveable		—			(1,507	)		(100.0	)%		—			—
Equity in net earnings of unconsolidated affiliates		1,258			3,092			(59.3	)%		1.3	%		3.2	%

Loss from continuing operations before income taxes		(16,600	)		(12,390	)		34.0	%		(17.1	)%		(12.8	)%
Income tax benefit		(7,695	)		(5,639	)		36.5	%		(7.9	)%		(5.8	)%

Loss from continuing operations		(8,905	)		(6,751	)		31.9	%		(9.2	)%		(7.0	)%
Loss from discontinued operations, net of taxes		(1,401	)		(1,934	)		(27.6	)%		(1.4	)%		(2.0	)%

Net loss		(10,306	)		(8,685	)		18.7	%		(10.6	)%		(9.0	)%
Less: Net income attributable to noncontrolling interest		(3,189	)		(2,524	)		26.3	%		(3.3	)%		(2.6	)%

Net loss attributable to MedCath Corporation	$	(13,495	)	$	(11,209	)		20.4	%		(13.9	)%		(11.6	)%


Amounts attributable to MedCath Corporation common stockholders:
Loss from continuing operations, net of taxes	$	(12,341	)	$	(8,970	)		37.6	%		(12.7	)%		(9.3	)%
Loss from discontinued operations, net of taxes		(1,154	)		(2,239	)		(48.5	)%		(1.2	)%		(2.2	)%

Net loss	$	(13,495	)	$	(11,209	)		20.4	%		(13.9	)%		(11.6	)%


	Net Hospital Division Patient
	Accounts Receivable Outstanding
	(in thousands)
Payor Group	March 31, 2011		March 31, 2010
Medicare	$	17,862	$	16,145
Medicaid (1)		3,647		3,520
Self-pay (2)		5,586		4,962
Commercial & Other		20,122		21,438


Total	$	47,217	$	46,065


	Days Outstanding
	As of March 31, 2011
Payor Group	0-30			31-60			61-120			121-150			151-180			+181			Total
Medicare		53.8	%		29.1	%		27.2	%		7.7	%		12.7	%		4.8	%		37.8	%
Medicaid (1)		5.3	%		8.6	%		12.2	%		19.9	%		13.2	%		8.5	%		7.7	%
Self-pay (2)		1.2	%		5.7	%		14.6	%		22.7	%		33.4	%		54.2	%		11.8	%
Commercial & Other		39.7	%		56.6	%		46.0	%		49.7	%		40.7	%		32.5	%		42.7	%


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


	Days Outstanding
	As of March 31, 2010
Payor Group	0-30			31-60			61-120			121-150			151-180			+181			Total
Medicare		54.7	%		17.8	%		17.3	%		5.7	%		3.8	%		2.7	%		35.6	%
Medicaid (1)		4.1	%		12.6	%		12.5	%		11.3	%		7.6	%		10.2	%		7.5	%
Self-pay (2)		2.8	%		8.6	%		13.4	%		19.2	%		17.2	%		53.6	%		10.8	%
Commercial & Other		38.4	%		61.0	%		56.8	%		63.8	%		71.4	%		33.5	%		46.1	%


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


	(in thousands)
Heart Hospital of New Mexico and Arkansas Heart Hospital (1)	$	46,200
Bakersfield Heart Hospital		32,144
Hualapai Mountain Medical Center (2)		22,000
Louisiana Medical Center and Heart Hospital (2)		22,700

Continuing Operations	$	123,044